Risk-Shifting by Federally Insured Commercial Banks

32 Pages Posted: 24 Jul 2000 Last revised: 3 Oct 2010

See all articles by Armen Hovakimian

Armen Hovakimian

Baruch College - Zicklin School of Business

Edward J. Kane

Boston College - Department of Finance; National Bureau of Economic Research (NBER)

Date Written: August 1996

Abstract

Mispriced and misadministered deposit insurance imparts risk-shifting incentives to U.S. banks. Regulators are expected to monitor and discipline increases in bank risk exposure that would transfer wealth from the FDIC to bank stockholders. This paper assesses the success regulators had in controlling risk-shifting by U.S. banks during 1985-1994. In contrast to single-equation estimates developed from the option model by others, our simultaneous-equation evidence indicates that regulators failed to prevent large U.S. banks from shifting risk to the FDIC. Moreover, at the margin, banks that are undercapitalized shifted risk more effectively than other sample banks.

Suggested Citation

Hovakimian, Armen and Kane, Edward J., Risk-Shifting by Federally Insured Commercial Banks (August 1996). NBER Working Paper No. w5711. Available at SSRN: https://ssrn.com/abstract=225579

Armen Hovakimian

Baruch College - Zicklin School of Business ( email )

One Bernard Baruch Way
Box B10-225
New York, NY 10010
United States
646-312-3490 (Phone)
646-312-3451 (Fax)

HOME PAGE: http://zicklin.baruch.cuny.edu/faculty-profile/armen-hovakimian/

Edward J. Kane (Contact Author)

Boston College - Department of Finance ( email )

Fulton Hall
Chestnut Hill, MA 02467
United States
520-299-5066 (Phone)
617-552-0431 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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