The Risk Spiral: The Effects of Bank Capital and Diversification on Risk Taking
Sharon Peleg Lazar and
Alon Raviv ()
Authors registered in the RePEc Author Service: Sharon Peleg-Lazar ()
MPRA Paper from University Library of Munich, Germany
We present a model where bank assets are a portfolio of risky debt claims and analyze stockholders' risk-taking behavior while considering the strategic interaction between debtors and creditors. We find that: (1) as the leverage of a bank increases, risk shifting by borrowers increases, even if their leverage is unchanged (zombie lending). (2) While the literature demonstrates that an increase in the co-movement of a loan portfolio increases the bank's cost of default directly, we find that the increase in co-movement causes an increase in risk shifting that further increases the cost of default (3) Risk shifting decreases with the diversification of a loan portfolio.
Keywords: Risk taking; Banks; Comovements; Deposit insurance; Zombie lending (search for similar items in EconPapers)
JEL-codes: G21 G28 G32 G38 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cfn and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3) Track citations by RSS feed
Downloads: (external link)
https://mpra.ub.uni-muenchen.de/92134/1/MPRA_paper_92134.pdf original version (application/pdf)
Journal Article: The risk spiral: The effects of bank capital and diversification on risk taking (2019)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:92134
Access Statistics for this paper
More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().