Bank Risk-taking Research Articles

How does macroprudential policy affect the relationship between financial openness and bank risk-taking

This paper investigates how macroprudential policy affects the relationship between financial openness and bank risk-taking by utilizing Chinese commercial banking data from 2005 to 2021. We find that financial openness generally promotes bank risk-taking. Robustness checks consistently support this finding, including variable substitutions, sample period adjustments, controlling for other shocks, and endogeneity concerns. The impact of financial openness on risk-taking demonstrates potential heterogeneity, contingent upon factors such as bank financing constraints, risk management, and financial regulation. We delineate credit, interest rate, and asset price channels through which financial openness affects bank risk-taking, notably by amplifying bank credit volumes, diminishing credit asset ratios, compressing net interest margins and spreads, and elevating asset prices. Macroprudential policies are identified as effective countermeasures against the heightened bank risk-taking associated with financial openness, with the effectiveness of these policies varying by the specific regulatory instruments.

The Impact of TARP on Bank Risk-taking

The Impact of TARP on Bank Risk-taking

Can generalized trust enhance bank risk-taking? Evidence from the social credit system pilot in China

ABSTRACT We examine the impact of the pilot implementation of the Social Credit System (SCS) on bank risk-taking. Using a staggered difference-in-differences model, we identify the causal relationship between the SCS and bank risk-taking. Our findings suggest that the initiative of the SCS reduces passive risk-taking while promoting more proactive risk-taking.

The impact of bank liquidity, monetary policy and global crises on bank risk-taking: evidence from Vietnam

PurposeThis paper aims to examine the impact of bank liquidity, monetary policy and global crises on bank risk-taking behavior of Vietnamese banks. It provides evidence for a risk-taking channel of monetary policy through bank liquidity and global crises.Design/methodology/approachThe study uses the data set of 572 observations from 35 banks operating in Vietnam between 2005 and 2022, using the GMM regression technique.FindingsThe findings indicate that banks with higher liquidity tend to take more risks in the long run. Additionally, expansionary monetary policies encourage banks to take on more risk. Bank liquidity and global crises, such as the global financial crisis and the COVID-19 pandemic, not only directly affect bank risk-taking but also indirectly through monetary policy.Originality/valueThis paper expands the existing literature by examining the effect of bank liquidity, monetary policy and global crises on bank risk-taking by using the GMM and two models of which the authors regress the impact with and without bank liquidity and global crises. New factors affecting risk-taking, including operating cost, financial crisis and the COVID-19 pandemic are added into the model.

Targeted monetary policy, dual rates, and bank risk-taking

We assess whether dual interest rates – central bank funding at rates below the interest rates on reserves – influence the size and composition of bank credit. We measure exposure to the policy using daily reactions of bank funding costs to the announcement of the recalibration of the ECB’s TLTROs in April 2020. We then use the Euro area credit register to follow the evolution of bank lending conditions and risk-taking. We find that the measure had a strong positive effect on bank credit and, in contrast to a standard rate cut, was not accompanied by an increase in risk-taking.

Local official turnover and bank risk-taking: Evidence from China

This study investigates the impact of turnover among local government officials on the risk-taking of local commercial banks in China. Our findings reveal a positive relationship between official turnover and risk-taking in banks. The observed effect is mainly due to a deterioration in credit allocation and heightened competition among banks. Heterogeneous analysis indicates that the impact is more significant in non-election years, in years of enhanced anti-corruption efforts, in regions with poor credit environments, and among smaller banks or banks without political connections. Additionally, compared to normal and local turnover, the positive impact of local official turnover on banks' risk-taking is more pronounced for abnormal and non-local turnovers. These insights deepen our understanding of the economic consequences of official turnover on commercial banks and offer valuable perspectives for banks' risk management strategies.

The Impact of Corporate Governance on Bank Risk-taking: Evidence of Islamic Banks in Gulf Cooperation Council (GCC) Countries

Purpose — This study investigates the impact of Islamic corporate governance variables on risk-taking within a sample of 31 Islamic banks (IBs) operating in six countries in the Arab Gulf region during the period 2013–2022. Design/Methodology/Approach — The study utilises content analysis and employs two econometric models: the random-effect generalised least squares (GLS) technique and the generalised method of moments (GMM) approach. Findings — The findings reveal that two characteristics of Sharīʿah supervisory boards (SSBs), namely cross membership and knowledge in accounting and finance, have a negative impact on bank risk. However, it is observed that SSB size demonstrates a positive correlation with bank risk-taking, indicating that SSBs face challenges in effectively performing their supervisory role. Furthermore, it is noted that during the pandemic period, banks demonstrated significantly higher levels of credit risk and global risk. Originality/Value — This research provides a valuable addition to the existing literature by conducting the inaugural analysis of the relationship between SSBs and bank risk-taking in the Arab Gulf region, adding to the understanding of Islamic corporate governance dynamics. Research Implications — The study suggests reinforcing the structure of SSBs in IBs in the Gulf Cooperation Council (GCC) countries by appointing members with educational backgrounds in business, accounting, and finance. Furthermore, it supports the idea that the presence of shared scholars in IBs facilitates rational decision-making by SSBs and contributes to reduced risk-taking. Haut du formulaire

Independent directors’ connectedness and bank risk-taking

This study examines the role of independent directors’ network centrality in bank risk-taking. Following the shareholder-incentive hypothesis and social-network theory, we predict and find that independent directors’ connectedness is positively associated with bank risk-taking. The results hold after a battery of robustness checks and endogeneity tests. Furthermore, consistent with the influence channel of networks, we show that connectedness empowers independent directors, whereas influential independent directors facilitate aggressive investment. We also find that the risk-taking effects are more pronounced for complex banks and banks with higher equity capital, higher income diversity, and lower cost-efficiency.

How Does Macroprudential Policy Impact Bank Risk-Taking and Profitability: Evidence from Indian Commercial Banks

ABSTRACT This study analyses the impact of macroprudential policy (MaPP) on Indian banks’ risk-taking and profitability. Using commercial bank data from 2004–05 to 2019–20, the risk-taking is measured by Z-score, and loan loss provision and profitability by return on average assets and return on average equity, respectively. Employing the panel system-GMM technique, the study finds. (1) MaPP mitigates bank risk-taking by enhancing the bank’s stability and reducing the procyclicality of loan loss provisions. (2) MaPP is found to have a positive impact on bank profitability. (3) MaPP is found to be more effective in the context of private and foreign banks as compared to nationalized banks. (4) Within the macroprudential toolkit, reserve requirements and risk-weights are found to have a positive impact on risk-taking and profitability, whereas provisioning requirements are found to have a negative impact.

The Moderating Effect of Macroprudential Policies on the Relationship Between the Effectiveness of the Board of Directors in Shaping the Bank's Risk-Taking Behavior

Macroeconomic instability in 2020 caused by COVID-19 can affect the stability of the country's financial system and trigger risks to banking performance. The implementation of macroprudential policies and the effectiveness of the board of directors as policy implementers can be one of the solutions to this problem. The purpose of this study is to see how the influence of macroprudential policies and the effectiveness of the board of directors in shaping bank risk-taking behavior. The method used is panel data regression method and moderation regression with a sample of 43 banks listed on the Indonesia Stock Exchange including banks that consistently published their financial statements for the last five years. The results showed that partially only the effectiveness of the board of directors and company size affected bank risk-taking behavior, while macroprudential policies, macroprudential policies that moderate the effectiveness of the board of directors, and inflation were considered to not affect bank risk-taking behavior, this was due to differences in bank-specific characteristics, the effectiveness of corporate governance, policy implementation in the form of policy easing and tightening, and the interaction between macroprudential policies and monetary policy. However, simultaneously the independent variables and control variables have a significant influence on bank risk-taking behavior.

Does distrust in banks reduce bank risk-taking?

This paper investigates whether distrust in banks affects bank risk-taking. We test the hypothesis that increased distrust in banks prompts more vigilant monitoring by individuals, thus discouraging banks from engaging in risky behavior. Our analysis utilizes bank-level data from 85 countries spanning the years 2012-2022. We construct an indicator to measure distrust in banks using Google Trends for each country and year. We find no significant effect of distrust in banks on bank risk-taking. These results still hold after performing robustness checks. This conclusion does not challenge the commonly held view that authorities should promote trust in banks.

Corporate governance quality index and Islamic bank risk-taking

Corporate governance quality index and Islamic bank risk-taking

Tác động của hoạt động ngân hàng ngầm đến mức độ chấp nhận rủi ro tại các ngân hàng thương mại Việt Nam

Engaging in shadow banking activities may result in significant risks for banks and increase systematic risk as well. If the risk level is too high, it can lead to contagion to other banks. Therefore, the impact of shadow banking activities on risk-taking in Vietnam commercial banks needs to be clarified in the context of volatile financial markets. This article employs secondary data collected from the annual audited financial reports of 31 Vietnamese commercial banks and the World Bank database from 2010 to 2022. Regression results using the two-step system generalized moment estimation method show that participating in shadow banking activities will increase the risk-taking level of banks. Therefore, Vietnam commercial banks should be cautious when participating in shadow banking activities; the State Bank of Vietnam should issue specific regulations on disclosing information related to shadow banking activities as well as have a risk management and control mechanism for these activities to ensure the safety of the banking system’s operations.

Impact of Digital Finance on Credit Structure and Risk-Taking in Commercial Banks: An Empirical Analysis

With the rapid growth of new technologies such as big data, digital technology is increasingly permeating our daily lives. Financial institutions, particularly commercial banks, are also seizing opportunities in the wave of digital financial development to provide better financial services. However, this development in digital finance has affected the credit structure and risk-taking of banks. This study aims to empirically analyze the impact of digital finance development on the credit structure and risk-taking of commercial banks. Additionally, the study seeks to discuss how the combined effects of digital finance and credit structure influence bank risk-taking. Empirical analysis is conducted using financial data from commercial banks over the past decade. The analytical methods include collecting secondary data, statistical data processing, and regression analysis to evaluate the relationships between digital finance development, credit structure, and bank risk-taking. The empirical analysis results show that the development of digital finance has promoted an increase in the scale of bank credit and the ratio of personal loans to credit loans. Integrating digital finance with banks has proven to reduce the risk burden banks bear. Furthermore, as digital finance continues to develop, adjustments in the bank's credit structure also affect the risk burden borne by the banks. Based on these findings, it is recommended that commercial banks continue to adopt digital financial technologies to increase their credit scale and optimize their credit structure. Additionally, banks should consider developing policies that support integrating digital technologies to reduce risk burdens and enhance financial stability. Further research is also suggested to explore the long-term impact of digital finance on the overall financial performance and risk of banks

Bank capital requirements and risk-taking: Evidence from basel III

We study the effects of both tighter and looser bank capital requirements on bank risk-taking. We exploit credit register data matched with firm and bank level data in conjunction with changes in capital requirements stemming from Basel III, including the introduction of a SME supporting bank capital factor in the European Union. We find that tighter capital requirements reduce the supply of bank credit to firms, while looser capital requirements mitigate the credit supply effects of increasing capital. Importantly, at the loan level (credit supply), banks more affected by capital requirements change less the supply of credit to riskier than to safer firms, and these asymmetric effects occur for both the tightening and the loosening of bank capital requirements. Finally, these effects are also important at the firm-level for total credit availability and for firm survival. Interestingly, our results suggest that those banks most impacted by the tighter Basel III capital requirements prioritize credit among ex-ante riskier firms to avoid their closure, consistent with loan evergreening.

An Overview of the Impact of Digital Transformation on the Risk-taking of Commercial Banks

The digital transformation of commercial banks has been a general trend, and the new services brought by this new technology are becoming increasingly popular among customers and banks. For enabling customers to enjoy better service and banks to operate more efficiently and stably, the impact of digital transformation on the risk-taking of commercial banks has therefore attracted attention. By combing domestic and foreign research literature from 2016 to 2023, this paper respectively explores the significance, type and development status of the digital transformation of commercial banks, commercial banks' risk-taking and corresponding influencing factors, as well as impacts of digital transformation on the risk-taking. Conclusively, although there is no precise and unified conclusion on the impact of digital transformation on commercial banks' risk-taking, it does have the effect of reducing risk-taking under certain conditions. Hence, commercial banks need to analyze specific problems and use good strategies to overcome difficulties, and finally reach the outcome of reducing risk-taking through digital transformation.

Institutional mechanisms, ownership and bank risk-taking during crises

Previous studies indicate that prior period investor protection, quality of government/institution and ownership have little to no influence on bank risk-taking around crisis periods. Using contemporaneous data for 40 countries, we show that institutional mechanisms, investor protection, bank regulation and supervision (BRS) rules, and ownership, reduced bank risk-taking around the Global Financial Crisis (GFC) and the Eurozone Crisis/Sovereign Debt Crisis periods. Institutional mechanisms have the strongest risk-reducing impacts on bank risk-taking, whereas foreign and government ownership have the weakest impacts. The greater the distance from bank default the lower the likelihood of crisis regimes. Investor protection increased (decreased) the likelihood of the GFC (Eurozone Crisis) regimes. Government ownership increased (decreased) the likelihood of the GFC (Eurozone Crisis) regimes. Using a generalized bivariate copula function, we untangle the relation between crisis regimes and bank risk-taking by showing that higher risk-taking increases the likelihood of crisis regimes.

Bank Risk-Taking and Monetary Policy: Empirical Results for Taiwan

Bank Risk-Taking and Monetary Policy: Empirical Results for Taiwan

National culture and Islamic bank risk-taking in the Middle East and Asian countries

ABSTRACT This study investigates the influence of the national culture on risk-taking in Islamic banks. The sample comprises 60 Islamic banks in the Middle East, Southeast Asia, and South Asia from 2011 to 2019. Using the random effects generalized least squares model, we find that national culture influences risk-taking in Islamic banks, especially in the power distance dimension. Low power distance incentivizes greater risk. In low power distance countries, Islamic banks tend to adopt a more aggressive approach to their decisions because of the trust and authority of shareholders and depositors, resulting in excessive risk-taking. The findings have implications for regulators and Islamic bank managers to consider national cultural elements when developing bank risk management policies.

The Effects of Interest Rates on Bank Risk-Taking in South Africa: Do Cyclical and Location Asymmetries Matter?

We examine the nonlinear relationship between interest rates on bank risk-taking behavior in South Africa between 2008:q1 and 2022:q3 using nonlinear autoregressive distributive lag (NARDL) and quantile autoregressive distributive lag (QARDL) models. Whilst the preliminary estimates from linear ARDL produce results adhering to conventional theory, the NARDL and QARDL analysis shows that the relationship between the variables is more complex. On one hand, the NARDL model shows that the phase of monetary policy (cyclical asymmetries) is important in determining the pass-through effects of interest rates on bank risk behavior. We find that both contractionary and expansionary monetary policy increases long-term risk through decreased liquidity for the former and increased non-performing loans for the latter. On the other hand, the QARDL model shows that the level of bank risk behavior (location asymmetries) is also important in determining the impact of interest rates on bank risk behavior. We find that interest rates affect bank risk behavior in ‘medium-to-high risk environments’ for unsecured loans and lending and in ‘medium-to-low risk environments’ for liquidity. Overall, these results enable us to recommend ways in which the SARB can strengthen its monitoring mechanisms given the multifaceted impact of interest rates on bank risk-taking.