Financial Markets Development, Business Cycles, and Bank Risk in South America
Research in International Business and Finance, Vol. 36, 2016, pp. 472-484.
53 Pages Posted: 13 Jun 2015 Last revised: 15 Dec 2015
Date Written: May 2, 2015
In this paper, we examine whether banking crises or business cycles affect the influence of financial markets development on bank risk in a sample of 37 publicly listed commercial banks in seven South American countries over a 22-year period between 1991 and 2012. Banking crises in this region offer a natural setting in which the impact of financial markets development on bank risk is examined. We find that financial markets development improves banks’ capitalization ratio and reduces their exposure to non-traditional banking activities, suggesting that financial markets development on average reduces bank risk. In addition, banking crises and business cycles appear to moderate the impact of financial markets development on bank risk. In the aftermath of banking crises, banks appear to concentrate more on their core traditional banking activities.
Keywords: capitalization; banking crisis; bank risk; financial markets development; South America
JEL Classification: G15, G21, G32, O16
Suggested Citation: Suggested Citation