Risk Mitigating versus Risk Shifting: Evidence from Banks Security Trading in Crises

Victoria Vanasco, Enrico Sette, Andrea Polo and José-Luis Peydró
Authors registered in the RePEc Author Service: Jose-Luis Peydro

No 1219, Working Papers from Barcelona School of Economics

Abstract: 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.

Keywords: uncertainty; financial crises; bank capital; securities; held to maturity; available for sale; trading book; COVID-19; risk shifting; interbank funding; concentration risk; risk weights (search for similar items in EconPapers)
JEL-codes: G01 G21 G28 (search for similar items in EconPapers)
Date: 2020-11
New Economics Papers: this item is included in nep-cba, nep-cfn and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Working Paper: Risk mitigating versus risk shifting: evidence from banks security trading in crises (2023)
Working Paper: Risk mitigating versus risk shifting: Evidence from banks security trading in crises (2023)
Working Paper: Risk Mitigating versus Risk Shifting: Evidence from Banks Security Trading in Crises (2020)
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