Risk mitigating versus risk shifting: Evidence from banks security trading in crises

Arbeitspapier

We show that risk-mitigating incentives dominate risk-shifting incentives in fragile banks. We study security trading by banks, as banks can easily and quickly change their risk exposure within their security portfolio. For identification, we exploit different crisis shocks and supervisory ISIN-bank-month-level data. Less capitalized banks take relatively less risk after financial stress shocks. Results hold within identical regulatory capital risk weights categories. Moreover, additional tests suggest that banks’ own incentives, rather than supervision, are the main drivers. Results hold for the different crisis shocks since 2007/08, including the COVID-19 one. A model of bank behavior rationalizes our findings.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: European Corporate Governance Institute – Finance Working Paper ; No. 713/2020

Classification and Topics

• Classification: Wirtschaft ; Financial Economics: General ; Financial Crises ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages ; Financial Institutions and Services: Government Policy and Regulation ; Corporate Finance and Governance: General
• Subject: risk shifting ; financial crises ; securities ; bank capital ; reach for yield ; uncertainty ; risk weights ; supervision ; franchise value ; COVID-19

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Peydró, José-Luis ; Polo, Andrea ; Sette, Enrico ; Vanasco, Victoria
• Event: Veröffentlichung
• (who): SSRN
• (where): Rochester, NY
• (when): 2023

Further information

• DOI: doi:10.2139/ssrn.3732831
• Handle: http://hdl.handle.net/10419/270732
• Last update: 10.03.2025, 11:44 AM CET