Market Reforms, Legal Changes and Bank Risk-Taking – Evidence from Transition Economies
Rensselaer Polytechnic Institute (RPI) - Lally School of Management & Technology
Fordham University; Bank of Finland
Bank of Finland - Institute for Economies in Transition (BOFIT); Fordham University Schools of Business
March 23, 2011
Bank of Finland Research Discussion Paper No. 7/2011
The policy changes and structural reforms in transition economies over the past two decades have created exogenous variations in institutional development, which offers us an ideal natural experiment to analyse the causal effects of institutions on bank risk-taking behaviour. This paper examines a wide array of institutional reforms in respect of law and legal institutions, banking liberalization, and enterprise restructuring in privatization and corporate governance. Using a difference-in-difference approach, we find that banks’ financial stability has increased substantially subsequent to the institutional reforms. Further analysis suggests that the enhancement of financial stability mostly comes from the reduction of asset risk. Moreover, the effects of institutional reforms on bank risk are more pronounced for domestic banks than foreign banks. From the policy consideration, our study sheds light on the risk implications of different institutional reforms that have been characterizing transition countries.
Number of Pages in PDF File: 44
Keywords: institutional development, bank risk, transition banking, foreign ownership
JEL Classification: G21, P30, P34, P52working papers series
Date posted: April 12, 2011
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