Bank Risk Taking and Liquidity Creation Following Regulatory Interventions and Capital Support
Allen N. Berger
University of South Carolina - Darla Moore School of Business; Wharton Financial Institutions Center; European Banking Center
Christa H. S. Bouwman
Texas A&M University; Wharton Financial Institutions Center
Thomas K. Kick
April 14, 2014
We present the first study that jointly examines how regulatory interventions and capital support affect troubled banks’ risk taking and liquidity creation. Using instrumental variables, we document that regulatory interventions and capital support both succeed in reducing bank risk taking. Regulatory interventions also trigger decreases in liquidity creation, pointing towards potential social costs of making troubled banks safer. These effects materialize quickly, persist in the long run, and are not offset by competitors’ actions. Our findings provide novel insights into how supervision affects bank conduct and informs the debate about the design of bank bailouts.
Number of Pages in PDF File: 45
Keywords: risk taking, liquidity creation, bank distress, regulatory interventions, capital support, bailouts
JEL Classification: G21, G28
Date posted: August 11, 2011 ; Last revised: April 26, 2014
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