Charter Value and Bank Stability Before and After the Global Financial Crisis of 2007-2008
36 Pages Posted: 28 Jun 2016 Last revised: 18 Oct 2017
Date Written: October 14, 2017
We investigate how bank charter value affects risk for a sample of OECD banks by using standalone and systemic risk measures before, during, and after the global financial crisis of 2007-2008. Prior to the crisis, bank charter value is positively associated with risk-taking and systemic risk for very large “too-big-too-fail” banks and large U.S. and European banks but such a relationship is inverted during and after the crisis. A deeper investigation shows that such a behavior before the crisis is mostly relevant for very large banks and large banks with high growth strategies. Banks' business models also influence this relationship. We find that for banks following a focus strategy, higher charter value amplifies both standalone and systemic risk for large U.S. and European banks. Our findings have important policy implications and cast doubts on the relevance of the uniform more stringent capital requirements introduced by Basel III.
Keywords: Systemic risk, Standalone risk, Charter value, Bank strategies, Too-big-too-fail, Global financial crisis, Bank regulation
JEL Classification: G21, G28, G32
Suggested Citation: Suggested Citation