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Bank capital and risk-taking: evidence from misconduct provisions

Belinda Tracey, Christian Schnittker () and Rhiannon Sowerbutts
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Christian Schnittker: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH

No 671, Bank of England working papers from Bank of England

Abstract: We use provisions for misconduct issues as an instrumental variable to identify the causal effect of bank capital on risk-taking. Misconduct provisions can adversely affect bank capital via their negative impact on retained earnings, and we find evidence of this for UK banks. We also find strong support for our assumption that misconduct provisions are otherwise unrelated to risk-taking. We facilitate our analysis with a new UK panel dataset of bank-level information including misconduct provisions, merged with loan-level data on all regulated UK mortgages. Our main finding is that a negative bank capital shock leads to an increase in risk-taking.

Keywords: Banking; risk-taking; capital shocks; 2SLS (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn and nep-rmg
Date: 2017-08-18, Revised 2018-10-09
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