A Theoretical and Empirical Assessment of Bank Risk-Shifting Behavior
31 Pages Posted: 15 Feb 2007
Date Written: January 2007
Banks are important for mobilizing savings and then channeling those funds to productive investment projects. While providing these and other services that contribute to economic growth and development, banks take on various types of risks with the expectation that the return they receive will compensate for the risks. This paper theoretically models and empirically tests the extent to which information asymmetry between bank owners and depositors induces risk-shifting behavior that allows for higher bank net interest margins. The empirical results support the theoretical hypothesis that the greater the degree of information asymmetry the higher net interest margins base upon a sample of 3,115 banks in 98 countries.
Keywords: Global Banking Systems, Risk-shifting, Basel, Market Discipline
JEL Classification: G21, G28, G15
Suggested Citation: Suggested Citation