Do peer effects matter in bank risk? Some cross-country evidence

Abstract

This paper empirically investigates whether peer effects play a significant role in shaping banks’ risk. We use panel data from more than 550 public banks in 32 economies during the period of 2000––2018. By estimating the directional pairwise connectedness between banks to identify the heterogeneous influence that peers may exert to banks’ performance, we find supportive evidence that banks’ risk is positively associated with that of their peers. This finding is consistent with the hypothesis that banks may learn from their peers when making their own risk-taking decisions. Our result remains consistent when we use various approaches to mitigate the potential endogeneity problems, employ various indicators of bank risk, and exercise some other robustness checks. Furthermore, our findings reveal that peer effects exhibit variations in response to some specific bank characteristics and market conditions.