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CONFIDENCE AND OVERCONFIDENCE IN BANKING

Damiano Bruno Silipo (), Giovanni Verga () and Sviatlana Hlebik ()
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Sviatlana Hlebik: Dipartimento di Economia, Statistica e Finanza "Giovanni Anania" - DESF, Università della Calabria

No 201703, Working Papers from Università della Calabria, Dipartimento di Economia, Statistica e Finanza "Giovanni Anania" - DESF

Abstract: The paper investigates the causes of confidence and overconfidence and their effects on banking behavior and performance for a large sample of American banks in the period 2000-2013. We construct a new indicator of confidence based on banks’ loss provisions and show that before 2007 risk-taking, lending and leverage increased relatively more for banks with an intermediate degree of confidence (mid-confidents) than for the overconfident. The former also suffered the greatest losses in the financial crash of 2007-2008. Hence, unlike the previous literature on overconfidence, we find that the financial crisis was determined mainly by the increased confidence of the mid-confident bank CEOs and not the behavioral biases of overconfident CEOs. The latter, in fact, have more persistent beliefs and react less strongly to news during cyclical upswings. Finally, we show that overconfident behavior is unlikely to maximize a bank’s value.

Keywords: Confidence and Overconfidence Index; Banking behavior; Confidence and Bank Value (search for similar items in EconPapers)
JEL-codes: G01 G02 G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cbe and nep-neu
Date: 2017-04
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http://www.ecostat.unical.it/RePEc/WorkingPapers/WP03_2017.pdf First version, 2017-04 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:clb:wpaper:201703

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