Bank Capital and Risk-Taking: Evidence from Misconduct Provisions

40 Pages Posted: 23 Aug 2017 Last revised: 10 Oct 2018

Date Written: October 9, 2018

Abstract

Over the last decade, banks around the world have been confronted with substantial misconduct costs. We employ provisions for misconduct costs as an instrumental variable to identify the causal effect of a bank capital shock on risk-taking. Using new hand-collected data, we show that misconduct provisions have adversely affected bank capital across U.K. banks. Our instrumental variable approach additionally exploits an important difference in timing between current risk-taking and the past misconduct that current misconduct provisions refer to. Our main finding is that a negative bank capital shock causes an increase in risk-taking in the U.K. mortgage market.

Keywords: banking, risk-taking, capital shocks, 2SLS

JEL Classification: G21, G28

Suggested Citation

Tracey, Belinda and Sowerbutts, Rhiannon, Bank Capital and Risk-Taking: Evidence from Misconduct Provisions (October 9, 2018). Bank of England Working Paper No. 671. Available at SSRN: https://ssrn.com/abstract=3023280 or http://dx.doi.org/10.2139/ssrn.3023280

Belinda Tracey (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Rhiannon Sowerbutts

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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