Agency Problems and Risk Taking at Banks

Federal Reserve Bank of New York Staff Reports, Number 29

Posted: 23 Jan 1998  

Rebecca S. Demsetz

Data For Decisions LLC

Philip E. Strahan

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

Marc R. Saidenberg

affiliation not provided to SSRN

Multiple version iconThere are 2 versions of this paper

Date Written: September 1997

Abstract

The moral hazard problem associated with deposit insurance generates the potential for excessive risk taking on the part of bank owners. The banking literature identifies franchise value -- a firm's profit-generating potential -- as one force mitigating that risk taking. In the presence of owner/manager agency problems, managerial risk aversion may also offset the excessive risk taking that stems from moral hazard. Empirical models of bank risk have focused either on the disciplinary role of franchise value or on owner/manager agency problems. We estimate a unified model and find that both franchise value and ownership structure affect risk at banks. More important, we identify an interesting interaction effect: The relationship between ownership structure and risk is significant only at low franchise value banks -- those where moral hazard problems are most severe and where conflicts between owner and manager risk preferences are therefore strongest. Using loans to insiders as an alternative indicator of owner/manager agency problems, we find a similar interaction effect.

JEL Classification: G2, G3

Suggested Citation

Demsetz, Rebecca S. and Strahan, Philip E. and Saidenberg, Marc R., Agency Problems and Risk Taking at Banks (September 1997). Federal Reserve Bank of New York Staff Reports, Number 29. Available at SSRN: https://ssrn.com/abstract=55020

Rebecca S. Demsetz

Data For Decisions LLC ( email )

11 Winthrop Circle
Weston, MA 02493
United States

Philip E. Strahan (Contact Author)

Boston College - Department of Finance ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States
617-552-6430 (Phone)
617-552-0431 (Fax)

HOME PAGE: http://www2.bc.edu/~strahan

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Marc R. Saidenberg

affiliation not provided to SSRN

No Address Available

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