Charter value, risk-taking and systemic risk in banking before and after the global financial crisis of 2007-2008. Issue 36 (1st August 2020)

• Record Type: Journal Article
• Authors: Bakkar, Yassine; Rugemintwari, Clovis; Tarazi, Amine
• Is Part Of: Applied economics. Volume 52:Issue 36(2020)
• Page Start: 3898
• Page End: 3918
• Publication Date: 2020-08-01
• Subjects: Systemic risk -- standalone risk -- charter value -- global financial crisis -- bank regulation; G21 -- G28 -- G32; Economics -- Periodicals; 330
• DOI: 10.1080/00036846.2020.1725234
• Languages: English
• ISSNs: 0003-6846

Abstract

ABSTRACT: We investigate how bank charter value affects risk for a sample of OECD banks by using standalone and systemic risk measures before, during, and after the global financial crisis of 2007–2008. Prior to the crisis, bank charter value is positively associated with risk-taking and systemic risk for very large 'too-big-too-fail' banks and large U.S. and European banks but such a relationship is inverted during and after the crisis. A deeper investigation shows that such a behaviour before the crisis is mostly relevant for very large banks and large banks with high growth strategies. Banks' business models also influence this relationship. We find that for banks following a focus strategy, higher charter value amplifies both standalone and systemic risk for large U.S. and European banks. Our findings have important policy implications and cast doubts on the relevance of the uniform more stringent capital requirements introduced by Basel III.