Abstract

http://ssrn.com/abstract=1908102
 
 

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Bank Risk Taking and Liquidity Creation Following Regulatory Interventions and Capital Support


Allen N. Berger


University of South Carolina - Moore School of Business; Wharton Financial Institutions Center; Tilburg University - CentER

Christa H. S. Bouwman


Case Western Reserve University - Department of Banking & Finance; Wharton Financial Institutions Center

Thomas K. Kick


Deutsche Bundesbank

Klaus Schaeck


University of Wales - Bangor Business School

March 15, 2012


Abstract:     
When banks are troubled, authorities often engage in regulatory interventions and/or provide capital support to resuscitate the bank and reduce bank risk taking. A potentially unintended effect of such actions may be a reduction in bank liquidity creation, with possible adverse consequences for the economy as a whole. This paper tests hypotheses regarding the effects of regulatory interventions and capital support on bank risk taking and liquidity creation using a unique dataset over the period 1999-2009. Our short-run analyses suggest that both types of actions are associated with statistically and economically significant reductions in risk taking and liquidity creation. These results are highly robust, and stand up to using propensity score matching and instrumental variable regressions to deal with potential endogeneity. Our long-run analyses suggest that 1) there are no significant changes in risk taking and liquidity creation in the years preceding regulatory interventions and capital support, consistent with a causal interpretation of our results; 2) most of the effects occur shortly after these actions are taken; and 3) the effects remain in place in the long run. Thus, both types of actions may have important intended consequences (risk reduction) and potentially unintended consequences (diminished liquidity creation), with implications for policymakers. In a final analysis that focuses on how competitor banks respond to reductions in liquidity creation at affected banks, we show that competitors make up for the drop in liquidity creation.

Number of Pages in PDF File: 54

Keywords: risk taking, liquidity creation, bank distress, regulatory interventions, capital support

JEL Classification: G21, G28

working papers series


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Date posted: August 11, 2011 ; Last revised: March 18, 2012

Suggested Citation

Berger, Allen N. and Bouwman, Christa H. S. and Kick, Thomas K. and Schaeck, Klaus, Bank Risk Taking and Liquidity Creation Following Regulatory Interventions and Capital Support (March 15, 2012). Available at SSRN: http://ssrn.com/abstract=1908102 or http://dx.doi.org/10.2139/ssrn.1908102

Contact Information

Allen N. Berger
University of South Carolina - Moore School of Business ( email )
1705 College St
Francis M. Hipp Building
Columbia, SC 29208
United States
803-576-8440 (Phone)
803-777-6876 (Fax)
Wharton Financial Institutions Center
Philadelphia, PA 19104-6367
United States
Tilburg University - CentER
P.O. Box 90153
Tilburg, DC 5000 LE
Netherlands
Christa H. S. Bouwman
Case Western Reserve University - Department of Banking & Finance ( email )
10900 Euclid Ave.
Cleveland, OH 44106-7235
United States
216-368-3688 (Phone)
216-368-6249 (Fax)
Wharton Financial Institutions Center
2306 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104
United States
Thomas K. Kick
Deutsche Bundesbank ( email )
Wilhelm-Epstein-Str. 14
D-60431 Frankfurt/Main
Germany
Klaus Schaeck (Contact Author)
University of Wales - Bangor Business School ( email )
Bangor, Gwynedd, Wales LL57 2DG
United Kingdom
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References:  186
Citations:  8

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