IDEAS home Printed from https://ideas.repec.org/a/eee/finsta/v40y2019icp1-14.html
   My bibliography  Save this article

What influences banks’ choice of credit risk management practices? Theory and evidence

Author

Listed:
  • Bülbül, Dilek
  • Hakenes, Hendrik
  • Lambert, Claudia

Abstract

Banks use different risk management practices with varying levels of sophistication. This paper examines the factors that determine the choice of risk-management practices. In a theoretical model, we identify two main determinants for the choice of risk management tools: bank competition and sector concentration in the loan market. We empirically test the predictions of our model using hand-collected data on the credit risk management of 249 German savings banks. The results are in line with our theory: Competition pushes banks to implement advanced risk management practices. Sector concentration in the loan market promotes credit portfolio modeling, but it inhibits credit risk transfer.

Suggested Citation

  • Bülbül, Dilek & Hakenes, Hendrik & Lambert, Claudia, 2019. "What influences banks’ choice of credit risk management practices? Theory and evidence," Journal of Financial Stability, Elsevier, vol. 40(C), pages 1-14.
    • Handle: RePEc:eee:finsta:v:40:y:2019:i:c:p:1-14
    DOI: 10.1016/j.jfs.2018.11.002
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1572308917308549
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jfs.2018.11.002?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Stulz, René M., 1984. "Optimal Hedging Policies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 19(2), pages 127-140, June.
    2. Dawood Ashraf & Yener Altunbas & John Goddard, 2007. "Who Transfers Credit Risk? Determinants of the Use of Credit Derivatives by Large US Banks," The European Journal of Finance, Taylor & Francis Journals, vol. 13(5), pages 483-500.
    3. Batten, Jonathan & Hogan, Warren, 2002. "A perspective on credit derivatives," International Review of Financial Analysis, Elsevier, vol. 11(3), pages 251-278.
    4. Puri, Manju & Rocholl, Jörg & Steffen, Sascha, 2011. "Global retail lending in the aftermath of the US financial crisis: Distinguishing between supply and demand effects," Journal of Financial Economics, Elsevier, vol. 100(3), pages 556-578, June.
    5. Klaus Düllmann & Nancy Masschelein, 2007. "A Tractable Model to Measure Sector Concentration Risk in Credit Portfolios," Journal of Financial Services Research, Springer;Western Finance Association, vol. 32(1), pages 55-79, October.
    6. Fernandez de Guevara, Juan & Maudos, Joaquin & Perez, Francisco, 2007. "Integration and competition in the European financial markets," Journal of International Money and Finance, Elsevier, vol. 26(1), pages 26-45, February.
    7. Allen, Franklin & Carletti, Elena, 2006. "Credit risk transfer and contagion," Journal of Monetary Economics, Elsevier, vol. 53(1), pages 89-111, January.
    8. Jiménez, Gabriel & Lopez, Jose A. & Saurina, Jesús, 2013. "How does competition affect bank risk-taking?," Journal of Financial Stability, Elsevier, vol. 9(2), pages 185-195.
    9. Rüdiger Fahlenbrach & Robert Prilmeier & René M. Stulz, 2012. "This Time Is the Same: Using Bank Performance in 1998 to Explain Bank Performance during the Recent Financial Crisis," Journal of Finance, American Finance Association, vol. 67(6), pages 2139-2185, December.
    10. Hakenes, Hendrik & Schnabel, Isabel, 2010. "Credit risk transfer and bank competition," Journal of Financial Intermediation, Elsevier, vol. 19(3), pages 308-332, July.
    11. Stephens, Eric & Thompson, James R., 2017. "Information asymmetry and risk transfer markets," Journal of Financial Intermediation, Elsevier, vol. 32(C), pages 88-99.
    12. Carbó, Santiago & Humphrey, David & Maudos, Joaquín & Molyneux, Philip, 2009. "Cross-country comparisons of competition and pricing power in European banking," Journal of International Money and Finance, Elsevier, vol. 28(1), pages 115-134, February.
    13. Bernadette Minton & René Stulz & Rohan Williamson, 2009. "How Much Do Banks Use Credit Derivatives to Hedge Loans?," Journal of Financial Services Research, Springer;Western Finance Association, vol. 35(1), pages 1-31, February.
    14. Allen, Franklin & Santomero, Anthony M., 1997. "The theory of financial intermediation," Journal of Banking & Finance, Elsevier, vol. 21(11-12), pages 1461-1485, December.
    15. Pennacchi, George G, 1988. " Loan Sales and the Cost of Bank Capital," Journal of Finance, American Finance Association, vol. 43(2), pages 375-396, June.
    16. Keeley, Michael C, 1990. "Deposit Insurance, Risk, and Market Power in Banking," American Economic Review, American Economic Association, vol. 80(5), pages 1183-1200, December.
    17. John H. Boyd & Gianni De Nicoló, 2005. "The Theory of Bank Risk Taking and Competition Revisited," Journal of Finance, American Finance Association, vol. 60(3), pages 1329-1343, June.
    18. Beltratti, Andrea & Stulz, René M., 2012. "The credit crisis around the globe: Why did some banks perform better?," Journal of Financial Economics, Elsevier, vol. 105(1), pages 1-17.
    19. Froot, Kenneth A. & Stein, Jeremy C., 1998. "Risk management, capital budgeting, and capital structure policy for financial institutions: an integrated approach," Journal of Financial Economics, Elsevier, vol. 47(1), pages 55-82, January.
    20. Anthony M. Santomero, 1997. "Commercial Bank Risk Management: An Analysis of the Process," Center for Financial Institutions Working Papers 95-11, Wharton School Center for Financial Institutions, University of Pennsylvania.
    21. Batten, Jonathan & Hogan, Warren, 2002. "Erratum to "A perspective on credit derivatives"," International Review of Financial Analysis, Elsevier, vol. 11(3), pages 249-249.
    22. Froot, Kenneth A & Scharfstein, David S & Stein, Jeremy C, 1993. "Risk Management: Coordinating Corporate Investment and Financing Policies," Journal of Finance, American Finance Association, vol. 48(5), pages 1629-1658, December.
    23. Allen N. Berger & Leora F. Klapper & Rima Turk-Ariss, 2017. "Bank competition and financial stability," Chapters, in: Jacob A. Bikker & Laura Spierdijk (ed.), Handbook of Competition in Banking and Finance, chapter 10, pages 185-204, Edward Elgar Publishing.
    24. repec:ces:ifodic:v:8:y:2010:i:2:p:14566986 is not listed on IDEAS
    25. Wagner, Wolf, 2010. "Diversification at financial institutions and systemic crises," Journal of Financial Intermediation, Elsevier, vol. 19(3), pages 373-386, July.
    26. Krause, Andreas & Giansante, Simone, 2012. "Interbank lending and the spread of bank failures: A network model of systemic risk," Journal of Economic Behavior & Organization, Elsevier, vol. 83(3), pages 583-608.
    27. Christine A. Parlour & Guillaume Plantin, 2008. "Loan Sales and Relationship Banking," Journal of Finance, American Finance Association, vol. 63(3), pages 1291-1314, June.
    28. Anthony Santomero, 1997. "Commercial Bank Risk Management: An Analysis of the Process," Journal of Financial Services Research, Springer;Western Finance Association, vol. 12(2), pages 83-115, October.
    29. Christine Parlour & Guillaume Plantin, 2008. "Loan Sales and Relationship Banking," Post-Print hal-03415832, HAL.
    30. Koetter, Michael & Wedow, Michael, 2010. "Finance and growth in a bank-based economy: Is it quantity or quality that matters?," Journal of International Money and Finance, Elsevier, vol. 29(8), pages 1529-1545, December.
    31. Andrew Ellul & Vijay Yerramilli, 2013. "Stronger Risk Controls, Lower Risk: Evidence from U.S. Bank Holding Companies," Journal of Finance, American Finance Association, vol. 68(5), pages 1757-1803, October.
    32. Carbo Valverde, Santiago & Rodriguez Fernandez, Francisco, 2007. "The determinants of bank margins in European banking," Journal of Banking & Finance, Elsevier, vol. 31(7), pages 2043-2063, July.
    33. Amiyatosh Purnanandam, 2011. "Originate-to-distribute Model and the Subprime Mortgage Crisis," The Review of Financial Studies, Society for Financial Studies, vol. 24(6), pages 1881-1915.
    34. Maarten van Oordt, 2017. "Credit Risk Transfer and Bank Insolvency Risk," Staff Working Papers 17-59, Bank of Canada.
    35. Ibragimov, Rustam & Jaffee, Dwight & Walden, Johan, 2011. "Diversification disasters," Journal of Financial Economics, Elsevier, vol. 99(2), pages 333-348, February.
    36. SinkeyJr., Joseph F. & Carter, David A., 2000. "Evidence on the financial characteristics of banks that do and do not use derivatives," The Quarterly Review of Economics and Finance, Elsevier, vol. 40(4), pages 431-449.
    37. Martin Hellwig, 2010. "Capital Regulation after the Crisis: Business as Usual?," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 8(02), pages 40-46, July.
    38. Cebenoyan, A. Sinan & Strahan, Philip E., 2004. "Risk management, capital structure and lending at banks," Journal of Banking & Finance, Elsevier, vol. 28(1), pages 19-43, January.
    39. Hakenes, Hendrik, 2004. "Banks as delegated risk managers," Journal of Banking & Finance, Elsevier, vol. 28(10), pages 2399-2426, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Jennifer Ifft & Todd H. Kuethe & Gregory Lyons & Alexander Schultz & John Y. Zhu, 2024. "Crop insurance's impact on commercial bank loan volumes: Theory and evidence," Applied Economic Perspectives and Policy, John Wiley & Sons, vol. 46(1), pages 318-337, March.
    2. Ozili, Peterson K, 2021. "Has financial inclusion made the financial sector riskier?," MPRA Paper 105529, University Library of Munich, Germany.
    3. Wang, Chao & Liu, Xiaoxing & He, Jianmin, 2022. "Does diversification promote systemic risk?," The North American Journal of Economics and Finance, Elsevier, vol. 61(C).
    4. Ying Chu & Shujun Ye & Hongchang Li & Jack Strauss & Chen Zhao, 2023. "Can Digitalization Foster Sustainable Financial Inclusion? Opportunities for Both Banks and Vulnerable Groups," Sustainability, MDPI, vol. 15(8), pages 1-21, April.
    5. Umar, Muhammad & Ji, Xiangfeng & Mirza, Nawazish & Rahat, Birjees, 2021. "The impact of resource curse on banking efficiency: Evidence from twelve oil producing countries," Resources Policy, Elsevier, vol. 72(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Chen, Zhizhen & Liu, Frank Hong & Opong, Kwaku & Zhou, Mingming, 2017. "Short-term safety or long-term failure? Empirical evidence of the impact of securitization on bank risk," Journal of International Money and Finance, Elsevier, vol. 72(C), pages 48-74.
    2. Bülbül, Dilek & Lambert, Claudia, 2012. "Credit portfolio modelling and its effect on capital requirements," Discussion Papers 11/2012, Deutsche Bundesbank.
    3. Bayeh, Antonio & Bitar, Mohammad & Burlacu, Radu & Walker, Thomas, 2021. "Competition, securitization, and efficiency in US banks," The Quarterly Review of Economics and Finance, Elsevier, vol. 80(C), pages 553-576.
    4. Roshanthi Dias, 2017. "The role of managerial risk-taking in the ‘rise and fall’ of the CDS market," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 57, pages 117-145, April.
    5. Sascha Tobias Wengerek & Benjamin Hippert & André Uhde, 2019. "Risk allocation through securitization - Evidence from non-performing loans," Working Papers Dissertations 58, Paderborn University, Faculty of Business Administration and Economics.
    6. Yener Altunbas & Michiel van Leuvensteijn & David Marques-Ibanez, 2013. "Competition And Bank Risk: The Role Of Securitization And Bank Capital," Working Papers 13005, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
    7. Silva Buston, Consuelo, 2016. "Active risk management and banking stability," Journal of Banking & Finance, Elsevier, vol. 72(S), pages 203-215.
    8. Chiesa, Gabriella, 2008. "Optimal credit risk transfer, monitored finance, and banks," Journal of Financial Intermediation, Elsevier, vol. 17(4), pages 464-477, October.
    9. Li, Zhe & Sun, Jianfei, 2011. "Bank competition, securitization and risky investment," MPRA Paper 34173, University Library of Munich, Germany.
    10. Affinito, Massimiliano & Tagliaferri, Edoardo, 2010. "Why do (or did?) banks securitize their loans? Evidence from Italy," Journal of Financial Stability, Elsevier, vol. 6(4), pages 189-202, December.
    11. Azamat Abdymomunov & Atanas Mihov, 2019. "Operational Risk and Risk Management Quality: Evidence from U.S. Bank Holding Companies," Journal of Financial Services Research, Springer;Western Finance Association, vol. 56(1), pages 73-93, August.
    12. Allen N. Berger & Björn Imbierowicz & Christian Rauch, 2016. "The Roles of Corporate Governance in Bank Failures during the Recent Financial Crisis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(4), pages 729-770, June.
    13. Brei, Michael & Jacolin, Luc & Noah, Alphonse, 2020. "Credit risk and bank competition in Sub-Saharan Africa," Emerging Markets Review, Elsevier, vol. 44(C).
    14. Silva Buston, C.F., 2013. "Active Risk Management and Banking Stability," Other publications TiSEM 18a8d09e-79af-4993-8d64-b, Tilburg University, School of Economics and Management.
    15. Cerasi, Vittoria & Rochet, Jean-Charles, 2014. "Rethinking the regulatory treatment of securitization," Journal of Financial Stability, Elsevier, vol. 10(C), pages 20-31.
    16. Florian Leon, 2015. "What do we know about the role of bank competition in Africa?," CERDI Working papers halshs-01164864, HAL.
    17. Lapteacru, Ion, 2017. "Market power and risk of Central and Eastern European banks: Does more powerful mean safer?," Economic Modelling, Elsevier, vol. 63(C), pages 46-59.
    18. Sääskilahti, Jaakko, 2016. "Local bank competition and small business lending after the onset of the financial crisis," Journal of Banking & Finance, Elsevier, vol. 69(C), pages 37-51.
    19. Haq, Mamiza & Tripe, David & Seth, Rama, 2022. "Do traditional off-balance sheet exposures increase bank risk?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 80(C).
    20. Silva Buston, C.F., 2013. "Active Risk Management and Banking Stability," Other publications TiSEM 1236246e-0f52-4a46-aeec-3, Tilburg University, School of Economics and Management.

    More about this item

    Keywords

    Banking; Risk management; Credit risk; Credit portfolio modeling; Credit risk transfer;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:finsta:v:40:y:2019:i:c:p:1-14. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jfstabil .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.