Looting and risk shifting in banking crises

John H. Boyd and Hendrik Hakenes

Journal of Economic Theory, 2014, vol. 149, issue C, 43-64

Abstract: We construct a model of the banking firm with inside and outside equity and use it to study bank behavior and regulatory policy during crises. In our model, a bank can increase the risk of its asset portfolio (“risk shift”), convert bank assets to the personal benefit of the bank manager (“loot”), or do both. A regulator has three policy tools: it can restrict the bankʼs investment choices; it can make looting more costly; and it can force banks to hold more equity. Capital regulation may increase looting, and in extreme cases even risk shifting. Looting penalties reduce both looting and risk-shifting.

Keywords: Looting; Stealing; Tunneling; Risk shifting; Asset substitution; Gambling (search for similar items in EconPapers)
JEL-codes: D82 G21 G28 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:149:y:2014:i:c:p:43-64

DOI: 10.1016/j.jet.2012.10.001

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