Financial Innovation and Bank Risk Taking

Anthony Santomero and Jeffrey Trester

Center for Financial Institutions Working Papers from Wharton School Center for Financial Institutions, University of Pennsylvania

Abstract: This paper investigates the effect of one change in the financial sector, namely, the growing ease with which assets created by the banking sector can be sold to other investors. Of interest is whether this reduced cost of value communication leads to higher levels of risky lending by the banking sector. Of equal interest is whether these same changes result in riskier banks, i.e., ones that are more vulnerable to instability and failure.

The results suggest that the risky asset portfolio held by the banking sector unambiguously increases as a result of the innovations considered. A reduction in illiquidity increases the banking sector's willingness to provide risk capital for real sector investment. On the other hand, it does not imply that the portfolios of banks will become more risky. Rather, there exists a trade-off between external shock risk, which is alleviated by increased asset liquidity, and the risk taking by banks on the returns of their assets, which is encouraged by these market changes.

Date: 1994-09
Note: This paper is only available in hard copy
References: Add references at CitEc
Citations:

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wop:pennin:94-08

Access Statistics for this paper

More papers in Center for Financial Institutions Working Papers from Wharton School Center for Financial Institutions, University of Pennsylvania Contact information at EDIRC.
Bibliographic data for series maintained by Thomas Krichel ().