Working Paper: NBER ID: w14113
Authors: Luc Laeven; Ross Levine
Abstract: This paper conducts the first empirical assessment of theories concerning relationships among risk taking by banks, their ownership structures, and national bank regulations. We focus on conflicts between bank managers and owners over risk, and show that bank risk taking varies positively with the comparative power of shareholders within the corporate governance structure of each bank. Moreover, we show that the relation between bank risk and capital regulations, deposit insurance policies, and restrictions on bank activities depends critically on each bank's ownership structure, such that the actual sign of the marginal effect of regulation on risk varies with ownership concentration. These findings have important policy implications as they imply that the same regulation will have different effects on bank risk taking depending on the bank's corporate governance structure.
Keywords: Bank Governance; Risk Taking; Regulation
JEL Codes: G18; G2; G3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Powerful owners (P14) | Bank risk taking (G21) |
| Cash flow rights (G19) | Bank risk taking (G21) |
| Ownership structure moderates regulations (G38) | Bank risk taking (G21) |
| Stricter capital regulations (G28) | Bank risk taking (powerful owners) (G21) |
| Stricter capital regulations (G28) | Bank risk taking (widely-held banks) (G21) |
| Deposit insurance (G28) | Bank risk taking (large equity holders) (G21) |