Bank Systemic Risk and Corporate Investment

Meg Adachi-Sato and Chaiporn Vithessonthi ()

No 17, PIER Discussion Papers from Puey Ungphakorn Institute for Economic Research

Abstract: We develop a simple three-period model in which a bank's investment is influenced by short-term financing and a probability of a financial crisis. The presence of moral hazard problems in banks and firms causes (1) banks to take on riskier loans, (2) bank systemic risk to increase, and (3) firms to invest in riskier projects. We measure “bank systemic risk†using three measures that capture (1) bank funding maturity and (2) bank asset commonality. We document that in a sample of firms in 10 emerging markets and advanced economies bank systemic risk is positively associated with the firm-level investment ratio after controlling for the country's cross-sectional mean ratio of total loans to total assets of banks, country-level and firm-level variables until the start of the financial crisis of 2007. The effect becomes negative after 2007. We show that bank systemic risk strengthens the sensitivity of corporate investment to growth opportunities.

Keywords: Banking System; Bank Systemic Risk; Corporate Investment; Growth Opportunities; Developing Countries; Developed Countries (search for similar items in EconPapers)
JEL-codes: E22 E44 G21 G31 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2016-01
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