An Analysis of Bank Charter Value and its Risk-Constraining Incentives

Posted: 10 Sep 2001

See all articles by Anthony Saunders

Anthony Saunders

New York University - Leonard N. Stern School of Business

Berry K. Wilson

Pace University - Department of Finance and Economics

Abstract

Valuable bank charters have been hypothesized to provide bank managers self-regulatory incentives to constrain their risk taking. However, this paper presents evidence that charter value itself may derive from high-risk activities, indicating that minimizing risk taking also would limit the value of the charter. During economic expansions, bank charter values increase to reflect growth opportunities. In turn, high-charter-value banks gain easier access to equity capital sources for expansion. The result is a positive relationship between charter value and capital ratios during expansions. However, this relationship may invert during economic contractions. Panel regressions demonstrate that the charter value and bank leverage relationship is sensitive to market conditions.

Keywords: Charter value, bank capital, risk taking incentives, business cycle

Suggested Citation

Saunders, Anthony and Wilson, Berry K., An Analysis of Bank Charter Value and its Risk-Constraining Incentives. Journal of Financial Services Research, Vol. 19, No. 2/3, April 2001. Available at SSRN: https://ssrn.com/abstract=280661

Anthony Saunders (Contact Author)

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
9-190, MEC
New York, NY 10012-1126
United States
212-998-0711 (Phone)
212-995-4220 (Fax)

Berry K. Wilson

Pace University - Department of Finance and Economics ( email )

Lubin School of Business
New York, NY 10038
United States

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