The relationship between excessive lending, risk premium and risk‐taking: Evidence from European banks

Thaer Alhalabi, Vitor Castro and Justine Wood

International Journal of Finance & Economics, 2023, vol. 28, issue 1, 448-471

Abstract: Banks normally trade‐off the amount of loans created by the amount of risk piled up in their assets portfolios. However, their performance can induce a ‘search for yield’ or ‘gamble to survive’ behaviour. Using sample of 149 European banks during the period 2001–2016, we show that the risk management hypothesis holds for the period after the 2007–2008 financial crisis and for large banks. Contrarily, the moral hazard hypothesis, under which banks practise excessive lending to relatively risky borrowers that pay higher premium but increase their credit risk, is supported in the pre‐crisis period and for small banks. Additionally, we provide important implications to suggest that the post‐crisis regulations have restrained banks with poor performance from the ‘gamble to survive’ behaviour.

Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://doi.org/10.1002/ijfe.2430

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:wly:ijfiec:v:28:y:2023:i:1:p:448-471

Ordering information: This journal article can be ordered from
http://jws-edcv.wile ... PRINT_ISSN=1076-9307

Access Statistics for this article

International Journal of Finance & Economics is currently edited by Mark P. Taylor, Keith Cuthbertson and Michael P. Dooley

More articles in International Journal of Finance & Economics from John Wiley & Sons, Ltd.
Bibliographic data for series maintained by Wiley Content Delivery ().