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Impact of FDICIA internal controls on bank risk taking

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  • Jin, Justin Yiqiang
  • Kanagaretnam, Kiridaran
  • Lobo, Gerald J.
  • Mathieu, Robert
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    Abstract

    The Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991 was designed, among other things, to introduce risk-based deposit insurance, increase capital requirements, and improve banks’ internal controls. Of particular interest in this study are the requirements for annual audit and reporting of management’s and auditor’s assessment of the effectiveness of internal control for banks with $500 million or more in total assets (raised to $1 billion in 2005). We study the impact of these requirements on banks’ risk-taking behavior prior to the recent financial crisis and the consequent implications for bank failure and financial trouble during the crisis period. Using a sample of 1138 banks, we provide evidence that banks required to comply with the FDICIA internal control requirements have lower risk taking in the pre-crisis period. Specifically, the volatility of net interest margin, the volatility of earnings, and Z score show less risk-taking behavior. Furthermore, these banks are less likely to experience failure and financial trouble during the crisis period.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 37 (2013)
    Issue (Month): 2 ()
    Pages: 614-624

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    Handle: RePEc:eee:jbfina:v:37:y:2013:i:2:p:614-624

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    Web page: http://www.elsevier.com/locate/jbf

    Related research

    Keywords: FDICIA; Internal controls; Bank risk taking; Bank failure; Bank trouble;

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    Cited by:
    1. Jin, Justin Yiqiang & Kanagaretnam, Kiridaran & Lobo, Gerald J., 2013. "Unintended consequences of the increased asset threshold for FDICIA internal controls: Evidence from U.S. private banks," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(12), pages 4879-4892.
    2. Ibrahim Fatnassi & Habib Hasnaoui & Zied Ftiti, 2014. "The impact of bank capital on profitability and risk in GCC countries: Islamic vs. Conventional," Working Papers 2014-413, Department of Research, Ipag Business School.
    3. Betz, Frank & Oprica, Silviu & Peltonen, Tuomas A. & Sarlin, Peter, 2013. "Predicting distress in European banks," Working Paper Series, European Central Bank 1597, European Central Bank.

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