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Bank risk taking and liquidity creation following regulatory interventions and capital support

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Author Info

  • Berger, A.N.
  • Bouwman, C.H.S.
  • Kick, T.
  • Schaeck, K.

    (Tilburg University, Center for Economic Research)

Abstract

During times of bank distress, authorities often engage in regulatory interventions and provide capital support to reduce bank risk taking. An unintended effect of such actions may be a reduction in bank liquidity creation, with possible adverse consequences for the economy as a whole. This paper tests hypotheses regarding the effects of regulatory interventions and capital support on bank risk taking and liquidity creation using a unique dataset over the period 1999-2009. We find that both types of actions are generally associated with statistically significant reductions in risk taking and liquidity creation in the short run and long run. While the effects of regulatory interventions are also economically significant, the effects of capital support are only economically significant in the long run. Thus, both types of actions have important intended and unintended consequences with implications for policymakers.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2011-088.

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Date of creation: 2011
Date of revision:
Handle: RePEc:dgr:kubcen:2011088

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Web page: http://center.uvt.nl

Related research

Keywords: risk taking; liquidity creation; bank distress; regulatory interventions; capital support;

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Cited by:
  1. Phil Molyneux & Klaus Schaeck & Tim Zhou, 2011. "‘Too Systemically Important to Fail’ in Banking," Working Papers 11011, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
  2. Allen N. Berger & Thomas Kick & Klaus Schaeck, 2012. "Executive Board Composition and Bank Risk Taking," Working Papers 12004, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
  3. Roman Horváth & Jakub Seidler & Laurent Weill, 2012. "Bank Capital and Liquidity Creation : Granger Causality Evidence," Working Papers 318, Institut für Ost- und Südosteuropaforschung (Institute for East and South-East European Studies).
  4. Timothy Bianco & Dieter Gramlich & Mikhail V. Oet & Stephen J. Ong, 2012. "Financial stress index: a lens for supervising the financial system," Working Paper 1237, Federal Reserve Bank of Cleveland.
  5. Michael Brei & Blaise Gadanecz, 2012. "Have public bailouts made banks' loan books safer?," BIS Quarterly Review, Bank for International Settlements, September.
  6. Black, Lamont K. & Hazelwood, Lieu N., 2013. "The effect of TARP on bank risk-taking," Journal of Financial Stability, Elsevier, vol. 9(4), pages 790-803.
  7. Lamont Black & Lieu Hazelwood, 2012. "The effect of TARP on bank risk-taking," International Finance Discussion Papers 1043, Board of Governors of the Federal Reserve System (U.S.).

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