The Risk Spiral: The Effects of Bank Capital and Diversification on Risk Taking

Sharon Peleg Lazar and Alon Raviv
Authors registered in the RePEc Author Service: Sharon Peleg-Lazar ()

MPRA Paper from University Library of Munich, Germany

Abstract: We present a model where bank assets are a portfolio of risky debt claims and analyze stockholders' risk-taking behavior while considering the strategic interaction between debtors and creditors. We find that: (1) as the leverage of a bank increases, risk shifting by borrowers increases, even if their leverage is unchanged (zombie lending). (2) While the literature demonstrates that an increase in the co-movement of a loan portfolio increases the bank's cost of default directly, we find that the increase in co-movement causes an increase in risk shifting that further increases the cost of default (3) Risk shifting decreases with the diversification of a loan portfolio.

Keywords: Risk taking; Banks; Comovements; Deposit insurance; Zombie lending (search for similar items in EconPapers)
JEL-codes: G21 G28 G32 G38 (search for similar items in EconPapers)
Date: 2019-02
New Economics Papers: this item is included in nep-ban, nep-cfn and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Journal Article: The risk spiral: The effects of bank capital and diversification on risk taking (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:92134

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