Revenge of the Steamroller: ABCP as a Window on Risk Choices
65 Pages Posted: 7 Aug 2016 Last revised: 16 Dec 2021
Date Written: June 28, 2019
We use credit-arbitrage asset-backed commercial paper vehicles as a laboratory to empirically examine financial institutions’ motivations to take bad-tail systematic risk. By comparing the characteristics of global banks that sponsored credit-arbitrage vehicles prior to the global financial crisis to those that didn’t, we show that owner-manager agency problems, government safety nets, and government ownership of banks are associated with bad-tail systematic risk-taking. Although good governance is associated with less risk-taking on average, well-governed banks that also have a high ex ante expectation of being bailed out by the government take more risk. Lastly, we find mixed evidence that tougher bank capital regulation deters bad-tail risk-taking.
Keywords: financial institutions, systematic risk, capital regulation, asset-backed commercial paper
JEL Classification: G21, G28, G32
Suggested Citation: Suggested Citation