Do Well-Capitalized Banks Take More Risk? Evidence from the Korean Banking System

36 Pages Posted: 10 Sep 2006  

Thomas D. Jeitschko

Michigan State University - Department of Economics

Shin Dong Jeung

Michigan State University - Department of Economics

Date Written: September 2006

Abstract

The relationship between banks' capitalizations and risk-taking behaviors has been one of the central issues in the banking literature because of its implications on regulatory policies. Despite the fact that a considerable amount of studies have been conducted concerning the issue, neither empirical nor theoretical studies reach a consensus. The aim of this paper is to provide an empirical study on this issue on the basis of new hypotheses and methodologies not utilized in previous studies. We build a testing model that incorporates the different incentives of the three entities that affect the risk determination of a bank; namely regulatory agencies, shareholders, and management. The test results using data from the Korean banking system show apparent differences in risk-capitalization relationships across banks differentiated by the level of capitalization, and across publicly and non-publicly-traded banks. These results provide clear evidence that the risk-capitalization relationships are, indeed, sensitive to the relative forces of the three sources of influence in determining asset risk.

Keywords: Banks' Risk, Bank Capitalization, Bank Regulation

JEL Classification: D0, G0, G2

Suggested Citation

Jeitschko, Thomas D. and Jeung, Shin Dong, Do Well-Capitalized Banks Take More Risk? Evidence from the Korean Banking System (September 2006). Available at SSRN: https://ssrn.com/abstract=929124 or http://dx.doi.org/10.2139/ssrn.929124

Thomas D. Jeitschko (Contact Author)

Michigan State University - Department of Economics ( email )

110 Marshall-Adams Hall
East Lansing, MI 48824
United States
517-355-8302 (Phone)
517-432-1068 (Fax)

HOME PAGE: http://www.msu.edu/~jeitschk/

Shin Dong Jeung

Michigan State University - Department of Economics ( email )

East Lansing, MI 48824
United States

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