Bank Equity Involvement in Industrial Firms and Bank Risk
40 Pages Posted: 22 Nov 2010 Last revised: 18 Jul 2012
Date Written: July 18, 2012
Abstract
The regulatory framework in Europe does not prevent banks from taking large or controlling equity stakes in non-financial firms, potentially contributing to higher levels of bank risk and financial instability. Using a panel of European commercial banks for the period 2004-2008, we find that higher levels of equity positions in industrial firms and higher proportions of industrial firms where the bank is the majority shareholder lead to higher bank activity and insolvency risk. At low levels of shareholder protection, these risk measures are reduced when equity investments are held for longer, an effect attenuated at higher levels of shareholder protection.
Keywords: equity investment, bank risk, shareholder protection
JEL Classification: G21
Suggested Citation: Suggested Citation