Abstract
This paper examines the determinants of European bank risk-taking during major financial crisis. Using a sample of banks from 26 countries over the period 2005–2015, we examine the nature of the relationship between bank risk, bank characteristics, regulatory, institutional and macroeconomic variables. We use a dynamic panel data modeling structure to capture the potential discrepancies in risk-taking behavior. We subdivide our sample into two sub-samples (East Europe and West Europe countries). We show that macroeconomic and regulatory variables seem to have non-negligible impact on bank risk-taking attitudes. We document that the relationship between bank risk, internal and external factors differs across samples.
Highlights
The eruption of the 2008 banking crisis and the subsequent great recession have stimulated interests in the analysis and understanding of bank stability
We include two indexes individually in the models (Kaufmann, Kraay, & Mastruzzi, 2006) which capture different aspects of the institutional environment. We show that these features have a profound influence on the level of bank risk-taking in different European regions and especially on credit risk level
This paper focuses on estimation methods for the simple AR(1) model: IRISKi,t = 0 + 1 IRISKi,t−1 + 2 Hi,t + 3It + i + i,t, ∀i, t log (Zscorei,t) = 0 + 1LogZscorei,t−1 + 2 Hi,t + 3It + i + i,t, ∀i, t where IRISK is a proxy for the credit risk; α0 and 0 are constant; LogZscore is a proxy for bank insolvency risk, respectively, on series for bank i in time t, IRISKi,t−1 and Zscorei,t−1 denote the one period lagged credit and insolvency risks, Hi,t indicates the internal bank factors; It are some external bank factors, ηiis an unobserved bank specific time-invariant effect which allows for the heterogeneity in the IRISKi,t series across banks, and υi,t is a disturbance term
Summary
The eruption of the 2008 banking crisis and the subsequent great recession have stimulated interests in the analysis and understanding of bank stability. As stated by Baselga-Pascual et al (2015), an improved understanding of the determinants of bank risk in the euro area is important for regulators and supervisors interested in benchmarking and validation issues related to the new EU banking rules. They may be of interest to a wide range of financial market participants, including borrowers, shareholders, and bondholders
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