Ata Can Bertay (Sabanci University) - Bank History and Risk-Taking: Are Systemically Important Banks Special?

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Ata Can Bertay (Sabanci University) - Bank History and Risk-Taking: Are Systemically Important Banks Special?

Co-author: Ljubica Dordevic (IMF)

Abstract:
Using an international panel of banks, we study whether banks’ capitalization and risk-taking are shaped by their prior economic experience. We find that, on average, bank’s past undercapitalization experience leads to more prudent lending and higher capitalization. However, we show that this finding is confined to relatively smaller banks. Following difficult times, the behavior of systemically important banks (SIBs), on the other hand, is more complex and crucially depends on the quality of the regulatory environment. Unlike their smaller peers, after undercapitalized periods, the SIBs increase their leverage and take more risk, but they do increase their regulatory capital if the regulatory quality is high. Following a systemic bank crisis, in countries with high quality regulatory environment the SIBs persistently and largely reduce their capitalization, unless the government intervenes to support the banking system. In a lower quality regulatory environment, however, a government intervention has perverse effects lowering SIBs’ capital ratios. Moral hazard and effectiveness of monitoring seem to be likely explanations for the documented heterogeneity in banks’ behavior.

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