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

48 Pages Posted: 16 Nov 2002 Last revised: 23 Dec 2022

See all articles by Edward J. Kane

Edward J. Kane

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

Armen Hovakimian

Baruch College - Zicklin School of Business

Luc Laeven

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

Multiple version iconThere are 2 versions of this paper

Date Written: November 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.

Suggested Citation

Kane, Edward J. and Hovakimian, Armen and Laeven, Luc A., How Country and Safety-Net Characteristics Affect Bank Risk-Shifting (November 2002). NBER Working Paper No. w9322, Available at SSRN: https://ssrn.com/abstract=352021

Edward J. Kane (Contact Author)

Boston College - Department of Finance ( email )

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Armen Hovakimian

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Luc A. Laeven

European Central Bank (ECB) ( email )

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Centre for Economic Policy Research (CEPR)

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