Does a Bank's History Affect Its Risk-Taking?
American Economic Review
vol. 105,
no. 5, May 2015
(pp. 321-25)
Abstract
We ask whether past macro-economic and bank-specific shocks experienced and survived by a bank affect its current capitalization and risk-taking. Using Call Report data from 1984 to 2010, we find that a bank's experience shapes its capital structure and risk appetite. Banks that have survived periods of undercapitalization tend to implement higher equity ratios and take less risk in the periods following such crises, as measured by net charge-offs, non-performing loans, or earnings volatility 10-25 years later. However, observing high rates of failure among other banks stirs banks in the opposite direction. The evidence is suggestive of institutional memory affecting banks' capital and risk-taking.Citation
Bouwman, Christa H. S., and Ulrike Malmendier. 2015. "Does a Bank's History Affect Its Risk-Taking?" American Economic Review, 105 (5): 321-25. DOI: 10.1257/aer.p20151093Additional Materials
JEL Classification
- G21 Banks; Depository Institutions; Micro Finance Institutions; Mortgages
- G28 Financial Institutions and Services: Government Policy and Regulation
- G32 Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- L25 Firm Performance: Size, Diversification, and Scope