scholarly journals FDICIA and Risk Shifting 1n the Banking Industry

2006 ◽  
Vol 7 (1) ◽  
pp. 87-116
Author(s):  
Seok-Weon Lee
Keyword(s):  
Moral Hazard ◽  
Risk Taking ◽  
Deposit Insurance ◽  
Banking Industry ◽  
Systematic Risk ◽  
Full Sample ◽  
Risk Taking Behavior ◽  
Federal Deposit Insurance ◽  
Asset Size ◽  
The U.S

This is an empirical study that examines how the Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991 in the U.S. banking industry affects the moral hazard risk-taking incentives of banks. We find that FDICIA appears to be effective in significantly reducing the systematic risk-taking incentives of the banks. Considering that the banks' asset portfolios are necessarily largely systematic risk-related, the significant decrease in their systematic risk-taking incentives provides some evidence of the effectiveness of FDICIA. However, with respect to the nonsystematic risk-taking behavior, the results generally indicate statistically insignificant decreases in the risk-taking incentives after FDICIA. To well-diversified investors who can diversify nonsystematic risk away, nonsystematic risk may not be a risk any more. However, to maintain a sound banking environment and to reduce the risk to individual banks, this result implies that regulatory agents should monitor the banks’ nonsystematic risk-taking behavior more closely, as long as it is positively related to the banks’ failures. We further test the change in the risk-taking incentives by partitioning the full sample into two groups: Banks with higher moral hazard incentives as those with larger asset size and lower capital ratio and banks with lower moral hazard incentives as those with smaller asset size and higher capital ratio. The main result for this test is that, with FDICIA, the decrease in the risk-taking incentives of the banks with higher moral hazard incentives (larger asset-size and lower capital-ratio banks) is less than that of the banks with lower moral hazard incentives (smaller asset-size and higher capital-ratio banks), with respect to both systematic and nonsystematic risk-taking measures. Furthermore, the change in the nonsystematic risk-taking incentives of the banks with higher moral hazard incentives is rather mixed, while their systematic incentives are decreased. These findings imply that the regulatory agents should allocate more time and effort toward monitoring the banks with higher moral hazard incentives with particular emphasis on their nonsystematic risk-taking behavior.

scholarly journals Changing Incentives and Opportunities for Risk-Taking in Recent U.S. Banking Industry

2005 ◽  
Vol 6 (1) ◽  
pp. 69-83
Author(s):  
Seok Weon Lee
Keyword(s):  
Ownership Structure ◽  
Risk Taking ◽  
Banking Industry ◽  
Agency Problem ◽  
Systematic Risk ◽  
Stock Ownership ◽  
Policy Suggestion ◽  
Insider Ownership ◽  
Control Hypothesis ◽  
The U.S

We examine how the rd,~ionship between bank ownership structure and risk-raking may be differently affected by the different regulatory regimes in the U.S. banking industry. We find that higher insider-ownership banks had greater risk-raking incentives than lower insider-ownership banks between 1987-1990 (a period of relative deregulation and decline of the U.S. banking industry), when we represent risk-raking by systematic risk. However, chis greater systematic risk-caking is unprofitable, indicating chat banks pursued perverse risky strategies in the lace l 980s as suggested by the moral-hazard hypothesis in banking literature. Bue we find char greater systematic risk-caking incentives of higher insider-ownership banks than lower insider-ownership banks disappeared, and that the association between risk-raking and profitability improved over the period of tightened regulation (1991-1995). These results may offer some supp:ming evidence for the effectiveness of regulatory reforms in the U.S. banking industry beginning around 1991. In testing the partitioned sample between lower insider-ownership banks vs. higher ones, we find that the positive relationship between insider ownership and risk-raking, and the negative relationship between the risk-taking and profitability, is significantly more transparent JOY the set of hankJ with lower insider mi11ership over the period 1987-1990. Thus, at r'flJ' lrn11 /weir of stock ownership, banks greatly increase risk, but ultimately unprofirahle risks, as the level of imider ownership rises over the period of dc:regulation and decline of the banking industry. This result is consistent with the corporate-control hypothesis. Over the periOO 1 lJ) 1-1995, we also find char at high levels of stock ownership, banks sc:c:med to engage in profirable risk-taking as the level of insider ownership rose, as predicted by the corporatc:-control hypothesis. Overall, in terms of only addressing the owner/manager agency problem, these results strongly suggest that in years of deregulation, the owner/manager agency problem of banks can be easily addressed by changing insider holdint,rs or ownership structure ro accommodate increased risk. But this policy suggestion should be taken with caution, since banks seem to take on more than enough risk in years of deregulation, which may ultimately increase the probability of bank failure. TI1is might suggest that the increase in insider holdinb:rs to address the ov,rner/manager agency problem should be associated with closer monitoring of the banks' risk-taking behavior. This policy suggestion shoulJ he encouraged more strongly, especially to banks with very low levels of stock ownership.

scholarly journals Firm size, corporate leverage and corporate dividend: Evidence from Korean banking industry.

2009 ◽  
Vol 6 (4) ◽  
pp. 317-322
Author(s):  
Seok Weon Lee
Keyword(s):  
Panel Data ◽  
Firm Size ◽  
Risk Taking ◽  
Deposit Insurance ◽  
Banking Industry ◽  
Protection System ◽  
High Profit ◽  
Risk Characteristics ◽  
Interaction Variables ◽  
Asset Size

This paper examines how the dividend policy of banks is associated with the level of safety of the banks. As the proxy for the safety of the bank, we employ the asset size and leverage measures. Considering that the explicit protection system of deposit insurance backing up the banking industry is prevailing and implicit forbearance policy practiced by the banking regulators generally would not allow the failure of especially large banks, the banks with larger asset size, other things being equal, would be considered safer than smaller banks. Also, following the implications of finance literature, higher leverage is believed to represent higher riskiness and the firms in higher leverage positions would have greater risk-taking incentives to maximize potential upward gains from high profit. From the panel data of Korean banks during 1994-2005, we find that the banks in a safer position significantly pay more dividends. That is, the banks with larger asset size and lower leverage tend to pay more dividends. In the tests employing partitioned samples and interaction variables for risk characteristics, we find more transparent and consistent results.

scholarly journals Moral hazard, agency problem and ownership structure

2006 ◽  
Vol 3 (2) ◽  
pp. 116-124
Author(s):  
Seok Weon Lee
Keyword(s):  
Moral Hazard ◽  
Ownership Structure ◽  
Risk Taking ◽  
Banking Industry ◽  
Agency Problem ◽  
Equity Capital ◽  
Managerial Ownership ◽  
Banking Regulations ◽  
Increased Risk ◽  
Asset Size

Using a sample of recent Korean banking industry for 1994-2000, we examine how the effectiveness of managerial ownership is affected by the regulatory regimes in banking industry and the banks’ moral hazard incentives. We found that the managers of the banks in the higher moral-hazard group (the group of banks that are known to have greater moral hazard incentives in the literature such as the banks with lower charter value, greater asset size and lower equity capital) tend to have greater incentives to align their interests to those of stockholders by taking on more risk as managerial ownership rises, compared to the banks in the lower moral-hazard group, but only over the relatively deregulated period 1994-1997. Thus, in terms of only addressing the owner/manager agency problem, the owner/manager agency problem of banks can be easily addressed by changing their insider holdings or ownership structure, in particular when the banks have relatively higher moral-hazard incentives and banking regulations are loose. But we also found that this increased risk-taking has not ultimately resulted in better performance of the bank. This result may suggest a very important policy implication regarding the safety of the banking industry. If the increased risk-taking with greater managerial ownership does not contribute to improving the bank profitability, taking on more risk could end up with only increasing the possibility of failure of the bank. Therefore, the increase in insider holdings to address the owner/manager agency problem may have to be associated with closer and more frequent monitoring of the banks’ risk-taking behavior.

scholarly journals The US banking system: does the size of the institution matter to its economic-financial situation?

2020 ◽  
pp. 19-19
Author(s):  
José Alejandro Fernández Fernández ◽  
Virginia Vázquez ◽  
Juan Antonio Vicente Virseda
Keyword(s):  
Neural Network ◽  
Moral Hazard ◽  
Deposit Insurance ◽  
Banking System ◽  
Factorial Analysis ◽  
Financial Situation ◽  
Financial Variables ◽  
The Us ◽  
Federal Deposit Insurance ◽  
The Relationship

This paper analyzes the relationship between the size of the entities in the US banking system and their economic-financial situation. The objective of this study is to group different economic and financial variables of the entities together into factors that characterize the US banking system and identify and identify how the factors vary according to the size of the entities. To do this, we start from the values taken by 32 economic-financial and regulatory ratios, obtained directly from the Federal Deposit Insurance Corporation (FDIC), for a period between the first quarter of 1990 and the penultimate of 2016. With this data it is performed a factorial analysis that allows synthesizing the 32 variables in 7 factors and, at the same time, obtaining relationships between these variables and the size and between themselves. Finally, through a neural network, the previous factors are hierarchized according to the influence that the size of the entities exerts on them. Among the conclusions reached, it should be noted that the loan structure is the factor that best classifies the size. It also determines the existence of a negative ?profitability-solvency? relationship with larger entities, (Assets> $ 250 B.) and smaller ones (Assets <$ 100 M.), as well as demonstrating the existence of moral hazard and the need for regulation that limits said risk (because the largest entities are the least solvent and assume the most risks).

scholarly journals RISK TAKING BEHAVIOR OF INDONESIAN BANKS: ANALAYSIS ON THE IMPACT OF DEPOSIT INSURANCE COOPERATION ESTABLISHMENT

2013 ◽  
Vol 15 (3) ◽  
pp. 3-25
Author(s):  
Moch Doddy Ariefianto ◽  
Soenartomo Soepomo
Keyword(s):  
Risk Taking ◽  
Deposit Insurance ◽  
Interest Rate Risk ◽  
Basel Ii ◽  
Data Set ◽  
Explanatory Variables ◽  
Before And After ◽  
Bank Behavior ◽  
Risk Taking Behavior ◽  
The Impact

This paper studies the risk taking behavior of Indonesian Banking Industry, especially before and after the establishment and the implementation of Deposit Insurance Corporation (IDIC). Using common set of explanatory variables; we test several empirical models to reveal the conduct of risk management by banks. In the spirit of BASEL II Accord, this paper take closer look at three types of risk behaviors namely credit risk, market or interest rate risk and operational risk, prior and post the establishment of IDIC. We tested the hypotheses using panel data set of banks operational in period of 2000-2009. The dataset consists of 121 banks with semiannual frequency (2420 observations). Our findings show that these variables explain well the three type bank risk exposures. The implementation of IDIC alters the bank behavior albeit in somewhat different way than initially hypothesized. The risk taking responses also varies across bank types. We found that State Owned Enterprise banks (SOE) behave differently relative to the rest types of the bank. Related to size, SOE banks behave more conservative after the implementation of IDIC. On the other hand its response on conditioned capital post the IDIC implementation is the opposite; they became more aggressive. We view the public pressure on this state banks has influenced the way they manage the risk.Keywords : Risk taking behavior, BASEL II, Deposit Insurance.JEL Classification: G11, G21, G32, C23

Determinants of non-performing loans in Chinese banks

2018 ◽  
Vol 12 (3) ◽  
pp. 273-289 ◽  
Author(s):  
Muhammad Umar ◽  
Gang Sun
Keyword(s):  
Risk Taking ◽  
Inflation Rate ◽  
Banking Industry ◽  
Foreign Exchange Rate ◽  
Bank Risk ◽  
Content Type ◽  
Credit Quality ◽  
Independent Variables ◽  
Chinese Banks ◽  
Risk Taking Behavior

Purpose The study aims to explore macroeconomic and banking industry-specific determinants of non-performing loans (NPLs) for Chinese banks, spanning from 2005 to 2014. Design/methodology/approach It uses three different models to explore the determinants. The first model has only macroeconomic variables as regressors; the second model has only banking industry-specific variables as independent variables; and the third model has macroeconomic and banking industry-specific variables as explanatory variables. Furthermore, system generalized method of moments estimation technique has been used to measure the coefficients of independent variables. Findings Gross domestic product (GDP) growth rate, effective interest rate, inflation rate, foreign exchange rate, type of bank, bank risk-taking behavior, ownership concentration, leverage and credit quality are significant determinants of NPLs in Chinese banks. Furthermore, the determinants of NPLs for listed and unlisted banks differ. Determinants of NPLs of listed banks include GDP, bank risk-taking behavior and credit quality. However, variation in NPLs of unlisted banks is explained by GDP, inflation rate, foreign exchange rate, bank risk-taking behavior, leverage and credit quality. Originality/value This study also finds that using only macroeconomic or banking industry-specific variables as regressors is not a right approach because it may lead to erroneous conclusions.

scholarly journals Credit Spreads And Systematic RiskIn The U.S. Banking Industry - A Neural Network Model Approach

2015 ◽  
Vol 31 (5) ◽  
pp. 1799
Author(s):  
Mark A. Anderson ◽  
Frantz Maurer
Keyword(s):  
Neural Network ◽  
Banking Industry ◽  
Systematic Risk ◽  
Network Models ◽  
Credit Spread ◽  
Credit Spreads ◽  
Statistical Dependence ◽  
Neural Network Models ◽  
Hidden Layer ◽  
The U.S

<p>This paper shows that systematic risk in the U.S. banking industry displayed historical responsiveness to variations in the AAA-Baa credit spread. Critically, through the development of a series of single hidden layer perceptron neural network models, the principal credit spreads in the fixed income market catalyzed a defined regime shift in systematic risk proximate the financial crisis, and was more influential to the quantification of realized systematic risk than the statistical specifications of beta. As an intriguing result of the learned model simulations, the beta slope coefficients for the largest banks in the study exhibited significant acceleration in the statistical dependence on credit spread variations.</p>

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