ACTIVITY STRATEGIES, AGENCY PROBLEMS, AND BANK RISK

Dung Tran, M. Kabir Hassan, Isabelle Girerd‐Potin and Pascal Louvet

Journal of Financial Research, 2020, vol. 43, issue 3, 575-613

Abstract: We investigate whether diversification affects bank risk taking in the U.S. banking industry, and whether this relation is partially explained by agency theory. Our results show that U.S. banks with a relatively high share of noninterest income become riskier when moving toward non‐interest‐income‐generating activities, especially activities from investment banking, proprietary trading, and so on. Diversification not only affects conditional average risk, but also the dispersion of risk. Moreover, diversified banks that received assistance from the Troubled Asset Relief Program (TARP) become riskier than diversified nonrecipients after TARP capital injections. Our main findings are robust to a battery of robustness tests. The results are partially explained under agency frameworks related to poor corporate governance.

Date: 2020
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https://doi.org/10.1111/jfir.12216

Related works:
Working Paper: Activity Strategies, Agency Problems, and Bank Risk (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:bla:jfnres:v:43:y:2020:i:3:p:575-613

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