Bank Risk-taking Research Articles

Does trade policy uncertainty increase commercial banks’ risk-taking? Evidence from China

This paper aims to investigate the transmission mechanism through which trade policy uncertainty (TPU) impacts bank risk-taking via firms' capital market performance. The research reveals that TPU significantly affects firms' capital market performance, leading to reduced stock liquidity, increased stock price crash risk, decreased stock price synchronicity, and lower stock returns. These effects are transmitted to bank risk-taking, resulting in an overall increase in banks’ passive risk-taking and a decrease in their willingness to undertake active risk-taking. Furthermore, we discover that the impact of TPU on bank risk-taking varies across different categories of firms, revealing heterogeneity in this transmission process. This study uncovers the critical mechanism through which TPU propagates in financial markets, offering important theoretical insights and policy implications for understanding and managing financial risk.

The Relationship between Board Characteristics and Bank Risk-Taking: The Moderating Effects of Market Discipline and Ownership Concentration

The purpose of this paper is to examine the direct impact of board-related characteristics on risk-taking behavior in the banking sector and the moderating effects of market discipline and ownership concentration on the relationship between these characteristics and bank risk-taking. Using data from a sample of Vietnamese commercial banks for the period 2010-2018, we find that, first, there is (partial) evidence of a negative relationship between the presence of female and independent directors and bank risk-taking. Second, the moderating effects of market discipline and ownership concentration are partially supported, providing some evidence of an incremental effect of specific board characteristics on bank risk-taking. In particular, the negative impact of directors’ educational level on risk becomes significant for banks that are listed, while the impact of independent directors is enhanced in banks with high ownership concentration. The large board size also has a negative influence on risk-taking when banks' ownership concentration is high. Our study has implications for corporate governance regulations and policymaking.

Local religious beliefs and bank risk-taking

This study investigates whether the heterogeneity in religious attributes between Catholics and Protestants reflects in bank risk-taking behavior. We find that banks located in areas with higher concentrations of Catholics relative to Protestants take less risks. The result is robust to several alternative specifications. Further analyses reveal that the result is driven primarily by local banks that operate in only one county. For such banks, local investors are economically more important. We show that these banks make safer investments, which results in fewer write-downs. They also generate less revenue from nontraditional banking activities, which are unsteady revenue sources.

Rethinking moral hazard: government protection and bank risk-taking

Why do firms take excessive risks that result in failure? Moral hazard theorists argue that the answer lies in the risk-boosting effects of the government safety net, which insulates firms from market discipline. We revisit this conventional wisdom by examining how exposure to government protection has contributed to recent trends in bank risk-taking in the USA. Drawing from insights from economic sociology, we highlight an additional way that exposure to government protection can shape organizational behavior: by reducing resource-based profitability pressures that can spur risky behavior. Using panel data analysis of risky US bank behavior between 1994 and 2015, we find that bank exposure to government protection was more often associated with less risk-taking than more of it. This pattern contradicts the predictions of moral hazard theory but aligns with the predictions of our own institutional-resource theory. We discuss implications for economic sociology and financial economics.

Bank homogeneity and risk-taking: Evidence from China

Homogeneity is a prominent problem facing China's banking industry, which is essentially a low-level competition lacking core competitiveness and brings challenges to the security and stability of the financial system. We find that homogeneity increases bank risk-taking, and this result is heterogeneous among different bank characteristics. It is further shown that reducing franchise value and increasing liquidity creation are two rational mechanisms through which bank homogeneity increases risk-taking. We also find that homogeneity increases common risk exposure and intensifies competition among banks, and economic policy uncertainty, tight monetary policy, and bank competition will prompt them to take more risks. Overall, our research suggests that in a banking system with restricted business models and strong regulatory constraints, homogeneity fails to achieve risk-sharing but increases individual risk-taking.

Population Aging and Bank Risk-Taking

Abstract What are the implications of an aging population for financial stability? To examine this question, we exploit geographic variation in aging across U.S. counties. We establish that banks with higher exposure to aging counties increase loan-to-income ratios. Laxer lending standards lead to higher nonperforming loans during downturns, suggesting higher credit risk. Inspecting the mechanism shows that aging drives risk-taking through two contemporaneous channels: deposit inflows due to seniors’ propensity to save in deposits; and depressed local investment opportunities due to seniors’ lower credit demand. Banks thus look for riskier clients, especially in counties where they operate no branches.

How macroprudential regulation and board effectiveness interact to shape bank risk-taking behavior

This study aims to investigate how macroprudential policies and corporate governance interact to curb bank risk-taking behavior for a sample of 915 publicly listed commercial banks in 53 countries over the 2011–2020 period. Excessive risk-taking by global financial institutions was singled out during the global financial crisis of 2007–2009. We first use a fixed-effects OLS panel model. Then, to address endogeneity concerns, we apply a two-step system GMM estimation. Our results show that the impact of board attributes on risk-taking depends critically on MPP’s policies. We find that MPPs can enhance the supervisory power of a board characterized by high independence, and a CEO who performs a dual function. However, a large board size appears to increase bank risk when multiple macroprudential policies are in place, which can result in managerial policies that may increase bank risk-taking. The supervisory role of women on the board is only effective in the presence of tight macroprudential policies. Bank regulators should consider the interaction between corporate governance and macroprudential policies when designing more effective bank regulations.

Liquidity creation and bank risk-taking: Evidence from a transition market

This study contributes to the banking literature by examining the effect of bank liquidity creation on bank risk-taking behaviors in Vietnam - a transition economy. Our data sample comprises 367 observations of 33 Vietnamese commercial banks from 2009 to 2020. We employ the Bias-corrected Least-Squares with Dummy Variables (LSDVC) estimation, which performs better than other dynamic estimators in small and unbalanced panel samples. In this research, bank risk primarily represents non-performing loans (NPLs). Empirical results show that bank liquidity creation significantly reduces NPLs. Otherwise, bank funding diversification significantly increases NPLs in Vietnamese commercial banks. Our findings are robust to alternative measurements of liquidity creation and bank risk. Additionally, we show the moderating role of bank scale in the effects of liquidity creation and funding diversification on bank risk-taking in Vietnamese banks. Our paper is the first research investigating the influence of liquidity creation on bank risk-taking in the specified situation of a transition economy. Besides, it provides empirical evidence to fill the existing research gap. Further, this study provides a list of implications for bank managers and policymakers to manage credit risks and improve the stability of the Vietnamese banking system.

THE EFFECT OF MERGERS AND ACQUISITIONS ON BANK RISK-TAKING

This paper evaluates how the risks associated with mergers and acquisitions (M&As) affect Bank Holding Companies’ (BHCs) levels of insolvency risk. Bank insolvency is hypothesized to be affected by M&As directly and indirectly through banks’ market risk, geographical diversification, and activity diversification. The relationship between bank insolvency, diversification, and market risk is estimated as a system using the Generalized Method of Moments (GMM). The key finding is that M&As erode banks’ insolvency, both directly and indirectly through the effects associated with their geographical diversification.

How digital transformation affects bank risk: Evidence from listed Chinese banks

In the digital age, the impact of digital transformation on business risk has become significant. This paper utilizes panel data from 36 listed banks in China from 2011 to 2021 to explore the diverse effects of digital transformation on bank risk-taking and its transmission channel. The findings reveal that digital transformation significantly decreases bank risk-taking. Additionally, while large and national banks show no substantial reduction in risk-taking, small and medium-sized, as well as regional banks, benefit significantly. Furthermore, the study demonstrates that bank profitability plays a key role in the risk reduction facilitated by digital transformation.

Does fintech lending expansion disturb financial system stability? Evidence from Indonesia

Literature suggests two contradictory views regarding the impacts of fintech lending on banks. The competition-instability proponents believe that fintech lending expansion erodes bank market and threatens banks as traditional intermediaries, thereby intensifying bank risk-taking and potentially disturbing financial stability. In contrast, the competition-stability proponents believe fintech lending reduces asymmetric information in the credit market, thus reducing bank risk-taking and increasing bank resilience to a systematic shock. This paper aims to examine the impacts of fintech lending expansion on bank-risk taking, i.e., credit channeling activity and bank risk. This study utilizes the OLS, random effects, fixed effects, and two-step GMM regressions to test the conjectures. Consistent with the competition-stability hypothesis, our evidence indicates that shadow banking increases as banks actively seek channels to diversify their risks but are less likely to use fintech lending as a credit channel. This paper also corroborates the notion that fintech lending expansion encourages banks to diversify their risks. Pertaining to the relationship between fintech lending and bank risk, our results suggest that fintech lending expansion encourages banks to work more efficiently to improve their credit quality rather than to intensify bank risk-taking. These findings also indicate that synergy between fintech lending and banks would increase bank credit quality. This paper also examines the reasonable credit limits for fintech lending firms based on MSMEs’ characteristics. Employing the threshold regression, we find that IDR5 billion is the maximum credit provision to induce the profitability of MSMEs whereas IDR6 billion is the maximum credit provision to minimize the default risk of MSMEs.

Internet Finance and Risk-Taking of City Commercial Banks: Evidence From China

China’s urban commercial banks are more likely to face risks with the rapid development of Internet finance. However, few studies unfold the impact of Internet finance on the risk-taking level of urban commercial banks and explore their role path in depth. To study the relationship between the two and their path of action, this paper takes 62 city commercial banks in China from 2011 to 2020 as research objects and makes empirical tests by Stata. The intermediary effect model is used to study its impact path from the perspectives of assets, liabilities, and intermediate services. The conclusions are as follows: (1) Internet finance aggravates the risk-taking of urban commercial banks; (2) This effect shows heterogeneity in listed and non-listed, trans-region and non-trans-region urban commercial banks; (3) Net interest margin, debt structure, and non-interest income show the mediating effect when Internet finance affects the risk-taking of urban commercial banks. The results are beneficial for urban commercial banks to change their business strategies with their characteristics and achieve sustainable and healthy development.

Analisis Pengaruh Karakteristik Dewan Pengawas Syariah Terhadap Perilaku Pengambilan Risiko dan Penghindaran Pajak Pada Perbankan Syariah Di Indonesia

Sharia Supervisory Board (DPS) in sharia banking plays an important role in supervising the activities of sharia banking to make sure that the bank can be free from usury (interest), gharar (unclear contract), and maisir (speculation). DPS in Islamic banks is expected to make Islamic banks more obedient to the rules. This study examines the effect of the DPS characteristics on risk-taking and tax avoidance behavior in Indonesian Islamic banking from 2010-2019. The characteristics studied included DPS financial expertise and the number of DPS meetings. Financial expertise is measured by the number of DPS who have expertise in finance. The research method used is multiple linear regression. The test results show that the number of DPS who are financial experts does not affect risk-taking behavior at Islamic banks. In contrast, the number of DPS meetings positively affects Islamic bank risk-taking. Then the number of DPS who are financial experts has a positive effect on tax avoidance at Islamic banks while the number of DPS meetings has no effect on tax avoidance at Islamic banks. The results of this study can be used as determinant to issue policies related to DPS responsibilities to maximize its role as a supervisory board in tax avoidance and risk taking.

Does prudential capital reduce bank risk-taking? Empirical evidence from the Indonesian banks industry

The implementation of macroprudential supervision, significantly tighter capital regulation in developing economies, has recently been debated, which focuses on reducing bank risk-taking and promoting financial stability in the banking sector. Our study investigates the impact of prudential capital on commercial bank risk-taking in Indonesia. We employed a GMM system approach to analyze bank and macro level data from 2004 to 2019. Our result confirms that appropriate capital regulations for reducing bank risk-taking are heterogeneous. Traditional capital ratios decrease bank risk-taking. However, the risk-based capital ratio shows an unexpected affirmative effect. Implementing macroprudential policy instruments of capital buffer effectively manages bank risk, and so does the regulatory capital pressure variable. The results are intimate for guiding commercial banks' risk management and capital effectiveness.

Do board characteristics moderate capital adequacy regulation and bank risk-taking nexus in Sub-Saharan Africa?

PurposeThe purpose of this paper is to examine whether board characteristics moderate the relationship between capital adequacy regulation and bank risk-taking of universal banks in Sub-Saharan Africa (SSA).Design/methodology/approachThe paper uses 700 bank-year observations of universal banks in SSA between 2009 and 2019. The paper further uses the two-step generalized method of moments as the baseline estimator.FindingsThe paper finds that capital adequacy regulation is positively related to overall bank and liquidity risks. Nonetheless, capital adequacy regulation increases credit risk in the sampled banks. The paper further reports that board characteristics individually and significantly moderate the relationship between capital adequacy regulation and risk-taking.Practical implicationsThe findings have implications for regulators of universal banks that board characteristics matter for capital adequacy regulation to impact risk-taking behavior.Originality/valueThe paper extends the existing literature on the effect of board characteristics on the capital adequacy regulations and risk-taking behavior nexus of universal banks.

TLAC bonds and bank risk-taking

This study explores the relation between total loss-absorbing capacity (TLAC) bonds and bank risk-taking. TLAC bonds contain a unique instrument in that they entail “structural subordination,” which enables them to be converted into equity to resolve a failure of subsidiaries of global systemically important banks (G-SIBs). Given the debate in the literature over the impact of subordinated bonds on issuers’ risk-taking, we find that a larger amount of TLAC bond issuance is associated with higher risk. Although TLAC regulation is designed to mitigate systemic risk, we unveil the opposite result, which may increase the probability of G-SIB default.

CEO behavior and CSR engagement: the moderating role of bank risk-taking

PurposeThe main purpose of this paper is to look at the link between chief executive officer (CEO) behavior and corporate social responsibility (CSR) engagement with the moderating role of bank risk-taking behavior.Design/methodology/approachBased on a 13-year data set (2007–2019), the authors applied the feasible generalized least squares with panel data to test the hypotheses.FindingsThe findings reveal a positive and significant link between CEO behavior and CSR engagement. Based on these findings, it can be argued that the characteristics of the CEO of the banks would improve the CSR strategies. Furthermore, the study suggests a moderating effect of bank risk-taking in the link between psychological bias and corporate social responsibility engagement (CSR engagement).Practical implicationsAs CEO behavioral characteristics are essential to understanding CSR practice, boards of directors should consider the behavioral traits of dominant and overconfident CEOs while designing CSR practices.Social implicationsIf the bank behaves in a socially responsible manner, direct and indirect stakeholders may be able to evaluate the level of risk-taking in more detail.Originality/valueThis research highlights the importance of CEO behavior characteristics for CSR, which is a crucial application that supports the upper echelons theory; and fills a gap in literature research. It is one of the few studies examining the interaction between risk-taking, CEO behavior and CSR engagement.

CEO power, bank risk-taking and national culture: International evidence

Using unique hand-collected data for 336 large banks across 48 countries, together with values of national culture, our empirical analysis uncovers three new robust findings. First, variations of bank risk-taking across national culture and CEO power are more pronounced when cultural values and CEO power indicators are high. Second, while the individualism dimension of national culture has a moderating influence, the uncertainty avoidance dimension has a reinforcing effect, on the relationship between CEO power and bank risk-taking. In more detail, the results for the average marginal effect of CEO power on risk for different cultural values show that CEO power has a negative (positive) or insignificant impact on bank risk-taking when the value of individualism (uncertainty avoidance) is low; however, the impact becomes positive (negative) and statistically significant as the value of individualism (uncertainty avoidance) increases. Third, intra-cultural diversity matters: ‘tight’ cultures (e.g., strong social norms) are more pronounced than ‘loose’ cultures (e.g., heterogeneous values) in influencing bank risk.

Bank risk-taking in emerging economies: Empirical evidence and theory

This article empirically studies the impact of foreign shocks on bank risk-taking in emerging economies. We use a country panel model for the 2001–2017 period. Using several measures of bank risk-taking, financial openness and foreign debt participation, we find if anything that the lower the financial openness in an economy, the higher the likelihood that the foreign monetary policy rate increases bank risk-taking and that the foreign debt participation reduces bank risk-taking. To provide an intuition of these results, we develop a simple small open economy model with banks facing foreign borrowing limits and taking excessive risk. The novel result is that, when the foreign borrowing limit binds, a lower foreign interest rate reduces excessive bank risk-taking. Since the foreign borrowing limit binds, the lower foreign rate does not boost bank credit but reduces bank default probability, which diminishes bank incentives to take excessive risk. Similarly, greater access to the international credit markets reduces excessive bank risk-taking.

Standalone risk management committee, risk governance diversity and Islamic bank risk-taking

Standalone risk management committee, risk governance diversity and Islamic bank risk-taking