Are bank shareholders enemies of regulators or a potential source of market discipline?

Arbeitspapier

In moral hazard models, bank shareholders have incentives to transfer wealth from the deposit insurer - that is, maximize put option value - by pursuing riskier strategies. For safe banks with large charter value, however, the risk-taking incentive is outweighed by the possibility of losing charter value. Focusing on the relationship between book value, market value, and a risk measure, this paper develops a semi-parametric model for estimating the critical level of bank risk at which put option value starts to dominate charter value. From these estimates, we infer the extent to which the risk-taking incentive prevailed during 1986-92, a period characterized by serious banking problems and financial turmoil. We find that despite the difficult financial environment, shareholders' risk-taking incentive was confined primarily to a small fraction of highly risky banks.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Staff Report ; No. 138

Classification and Topics

• Classification: Wirtschaft ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages ; Financial Institutions and Services: Government Policy and Regulation
• Subject: Aktionäre ; Bank ; Bankenaufsicht ; Moral Hazard ; Bankrisiko ; Bankinsolvenz ; Theorie ; USA

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Park, Sangkyun ; Peristiani, Stavros
• Event: Veröffentlichung
• (who): Federal Reserve Bank of New York
• (where): New York, NY
• (when): 2001

Further information

• Handle: http://hdl.handle.net/10419/60654
• Last update: 10.03.2025, 11:45 AM CET