Institutional Mechanisms, Ownership and Bank Risk-taking during Crises

Abstract

Previous studies indicate that prior period investor protection, quality of government/institution and ownership have little to no influence on bank risk-taking around crisis periods. Using contemporaneous data of 40 countries, we show that institutional mechanisms, investor protection, bank regulation and supervision (BRS) rules, and ownership reduced bank risk-taking around the Global Financial Crisis (GFC) and Eurozone Crisis/Sovereign Debt Crisis periods. Institutional mechanisms have the strongest risk-reducing impacts on bank risk-taking, whereas foreign and government ownership has the weakest impacts. The greater the percentage distance from bank default the lower the likelihood of crisis regimes. Investor protection increased (decreased) the likelihood of the GFC (Eurozone Crisis) regimes. Government ownership increased (decreased) the likelihood of the GFC (Eurozone Crisis) regimes. Using a generalized bivariate copula function, we untangle the relation between crisis regimes and bank risk-taking by showing that higher bank risk-taking increases the likelihood of bank crisis regimes.