Financial Crisis, Liquidity Infusion and Risk-Taking: The Case of Canadian Banks

40 Pages Posted: 30 Jan 2015

See all articles by Isaac K. Otchere

Isaac K. Otchere

Carleton University - Sprott School of Business

Sana Mohsni

Carleton University - Sprott School of Business

Date Written: September 12, 2014

Abstract

We examine the effects of government liquidity infusion on the risk taking behavior of Canadian banks and find that banks that received government financial assistance subsequently experienced a decrease in risk. The reduction in risk is induced by a shift from non-interest income related activities to more traditional interest income generating activities. After controlling for bank specific risk factors, we find that whilst the liquidity infusion has made the banks more safer, higher amounts of funds received appears to induce higher investments in non-interest income related activities. Further analysis aimed at disentangling the effects of the financial crisis from those of the liquidity infusion using observations of a control sample of banks that did not receive government support, shows that risk-taking by the focal banks in the aftermath of the financial crisis is significantly lower than that of the control sample. We argue that the stringent regulatory regime (involving high capital standards, tight mortgage market regulations, lower leverage ratio requirements, and close supervision of banks) and the need to preserve rent seem to account for the risk taking behavior of the banks.

Keywords: Financial crisis, bank risk, government support, non-disclosure, market discipline

JEL Classification: G01, G21; G28; G32

Suggested Citation

Otchere, Isaac K. and Mohsni, Sana, Financial Crisis, Liquidity Infusion and Risk-Taking: The Case of Canadian Banks (September 12, 2014). Available at SSRN: https://ssrn.com/abstract=2557220 or http://dx.doi.org/10.2139/ssrn.2557220

Isaac K. Otchere (Contact Author)

Carleton University - Sprott School of Business ( email )

1125 Colonel By Drive
Ottawa, Ontario K1S SB6
Canada
(613) 520-2600 ext 2731 (Phone)
(613) 520-4427 (Fax)

Sana Mohsni

Carleton University - Sprott School of Business ( email )

1125 Colonel By Drive
810 Dunton Tower
Ottawa, Ontario K1S SB6
Canada

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