Are bank shareholders enemies of regulators or a potential source of market discipline?

Sangkyun Park and Stavros Peristiani ()

No 138, Staff Reports from Federal Reserve Bank of New York

Abstract: In moral hazard models, bank shareholders have incentives to transfer wealth from the deposit insurer--that is, maximize put option value--by pursuing riskier strategies. For safe banks with large charter value, however, the risk-taking incentive is outweighed by the possibility of losing charter value. Focusing on the relationship between book value, market value, and a risk measure, this paper develops a semi-parametric model for estimating the critical level of bank risk at which put option value starts to dominate charter value. From these estimates, we infer the extent to which the risk-taking incentive prevailed during 1986-92, a period characterized by serious banking problems and financial turmoil. We find that despite the difficult financial environment, shareholders' risk-taking incentive was confined primarily to a small fraction of highly risky banks.

Keywords: Stockholders; Bank supervision; Bank management; bank risk; charter value; risk-taking; moral hazard (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2001-09-01
New Economics Papers: this item is included in nep-pke
Note: For a published version of this report, see Sangkyun Park and Stavros Peristiani, "Are Bank Shareholders Enemies of Regulators or a Potential Source of Market Discipline?" Journal of Banking and Finance 31, no. 8 (August 2007): 2493-515.
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Citations: View citations in EconPapers (8)

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Journal Article: Are bank shareholders enemies of regulators or a potential source of market discipline? (2007)
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