{"title":"Risk-taking in banks: does skin-in-the-game really matter?","authors":"","doi":"10.1057/s41261-024-00235-0","DOIUrl":null,"url":null,"abstract":"<h3>Abstract</h3> <p>The belief that bank capital helps improve stability takes for granted the idea that increases in capital are an incentive to reduce risk-taking because bank owners would have more to lose (skin-in-the-game) if their banks fail. Nevertheless, given the higher cost of capital as compared to debt, it is also possible that increases in capital would lead to higher risk-taking due to the need for banks to boost their returns. In light of these contradictory possibilities, we exploit exogenous variations of capital to empirically investigate the actual effects of capital on risk-taking. Our analyses based on a sample of nearly 1900 US Banking Holding Companies in the 1990–2020 period indicate that increasing capital actually leads to higher risk-taking, which contradicts the skin-in-the-game hypothesis. We show evidence that this relationship could be explained by the consequent increase in funding costs that creates pressure for better returns, which is normally achieved by means of taking higher risk. Our main findings are robust to a number of alternative model and sample specifications.</p>","PeriodicalId":15105,"journal":{"name":"Journal of Banking Regulation","volume":null,"pages":null},"PeriodicalIF":1.3000,"publicationDate":"2024-03-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Journal of Banking Regulation","FirstCategoryId":"1085","ListUrlMain":"https://doi.org/10.1057/s41261-024-00235-0","RegionNum":0,"RegionCategory":null,"ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q3","JCRName":"BUSINESS, FINANCE","Score":null,"Total":0}
引用次数: 0
Abstract
The belief that bank capital helps improve stability takes for granted the idea that increases in capital are an incentive to reduce risk-taking because bank owners would have more to lose (skin-in-the-game) if their banks fail. Nevertheless, given the higher cost of capital as compared to debt, it is also possible that increases in capital would lead to higher risk-taking due to the need for banks to boost their returns. In light of these contradictory possibilities, we exploit exogenous variations of capital to empirically investigate the actual effects of capital on risk-taking. Our analyses based on a sample of nearly 1900 US Banking Holding Companies in the 1990–2020 period indicate that increasing capital actually leads to higher risk-taking, which contradicts the skin-in-the-game hypothesis. We show evidence that this relationship could be explained by the consequent increase in funding costs that creates pressure for better returns, which is normally achieved by means of taking higher risk. Our main findings are robust to a number of alternative model and sample specifications.
期刊介绍：
Under the guidance of its highly respected Editors and an eminent and truly international Editorial Board?Journal of Banking Regulation?has established itself as one of the leading sources of authoritative and detailed information on all aspects of law and regulation affecting banking institutions.Journal of Banking Regulation?publishes in each quarterly issue detailed briefings analyses and updates which are of direct relevance to practitioners working in the field while meeting the highest intellectual standards.Journal of Banking Regulation?publishes the latest thinking and best practice on:Basel I II and IIIModels for banking supervisionInternational accounting standardsDeposit protectionEnforcement decisions in banking regulation and supervisionCross-border competition in banking servicesCorporate governance in banksHarmonisation in banking marketsSupervising credit riskAnti-money laundering legislation and regulationsMonetary integrationRisk capital and capital adequacySystemic risk in banking operationsCross-border regulationCross-border bank insolvencyModels for banking riskEssential reading for:central bankersbanking supervisorsfinancial regulatorsbankerscompliance officersheads of risk managementpolicy makersbank associationslawyers specialising in banking lawaccountantsinternal and external bank auditorsacademics and researchers
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