Factors driving risk in the US banking industry

Abstract

Purpose – The purpose of this paper is to investigate how several key risk factors, including capital-to-asset ratio (CAR), franchise value and lobbying, affect various measures of risk in the US banking industry before, during and after the financial crisis. The empirical analysis covers the period 2004-2013. Design/methodology/approach – Using recent bank holding company data, this research explores several factors driving risk in the US banking industry. The authors follow recent regulatory models and use a cross-sectional approach that can be employed as a complement to established regulatory bank failure and early warning models to detect and prevent bank crisis and to guide policy intervention over time. Findings – The findings provide evidence that the CAR has a negative relationship with bank risk. The authors also show that banks’ franchise values exhibit a positive relationship with bank risk in non-crisis years and a negative relationship during the crisis. The authors further find evidence suggesting that lobbying decreases bank risk in non-crisis years and increases risk during the crisis. Originality/value – Previous studies have controversially discussed the effect of factors driving bank risk. The authors contribute to the discussion and provide the first empirical study to analyze the effects of lobbying activities by bank holding companies on bank risk before, during and after the financial crisis.