How Country and Safety-Net Characteristics Affect Bank Risk-Shifting

47 Pages Posted: 16 Feb 2002

See all articles by Armen Hovakimian

Armen Hovakimian

Baruch College - Zicklin School of Business

Edward J. Kane

Boston College - Department of Finance; National Bureau of Economic Research (NBER)

Luc Laeven

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: October 11, 2002

Abstract

Risk-shifting occurs when creditors or guarantors are exposed to loss without receiving adequate compensation. This paper seeks to measure and compare how well authorities in 56 countries controlled bank risk shifting during the 1990s. Although significant risk shifting occurs on average, substantial variation exists in the effectiveness of risk control across countries. We find that the tendency for explicit deposit insurance to exacerbate risk shifting is tempered by incorporating loss-control features such as risk-sensitive premiums, coverage limits, and coinsurance. Introducing explicit deposit insurance has had adverse effects in environments that are low in political and economic freedom and high in corruption.

Keywords: deposit insurance, risk shifting

JEL Classification: G21, G28, G13

Suggested Citation

Hovakimian, Armen and Kane, Edward J. and Laeven, Luc A., How Country and Safety-Net Characteristics Affect Bank Risk-Shifting (October 11, 2002). AFA 2003 Washington, DC Meetings. Available at SSRN: https://ssrn.com/abstract=299523 or http://dx.doi.org/10.2139/ssrn.299523

Armen Hovakimian

Baruch College - Zicklin School of Business ( email )

One Bernard Baruch Way
Box B10-225
New York, NY 10010
United States
646-312-3490 (Phone)
646-312-3451 (Fax)

HOME PAGE: http://zicklin.baruch.cuny.edu/faculty-profile/armen-hovakimian/

Edward J. Kane

Boston College - Department of Finance ( email )

Fulton Hall
Chestnut Hill, MA 02467
United States
520-299-5066 (Phone)
617-552-0431 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Luc A. Laeven (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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