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Market reforms, legal changes and bank risk-taking – evidence from transition economies

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Author Info

  • Fang , Yiwei

    ()
    (Lally School of Management and Technology, New York)

  • Hasan, Iftekhar

    ()
    (Lally School of Management and Technology, New York, and Bank of Finland,)

  • Marton, Katherin

    ()
    (Fordham University, New York)

Abstract

The policy changes and structural reforms in transition economies over the past two decades have created exogenous variations in institutional development, which offers us an ideal natural experiment to analyse the causal effects of institutions on bank risk-taking behaviour. This paper examines a wide array of institutional reforms in respect of law and legal institutions, banking liberalization, and enterprise restructuring in privatization and corporate governance. Using a difference-in-difference approach, we find that banks’ financial stability has increased substantially subsequent to the institutional reforms. Further analysis suggests that the enhancement of financial stability mostly comes from the reduction of asset risk. Moreover, the effects of institutional reforms on bank risk are more pronounced for domestic banks than foreign banks. From the policy consideration, our study sheds light on the risk implications of different institutional reforms that have been characterizing transition countries.

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File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/BoF_DP_1107.pdf
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Bibliographic Info

Paper provided by Bank of Finland in its series Research Discussion Papers with number 7/2011.

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Length: 44 pages
Date of creation: 23 Mar 2011
Date of revision:
Handle: RePEc:hhs:bofrdp:2011_007

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Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/
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Related research

Keywords: institutional development; bank risk; transition banking; foreign ownership;

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  1. Asli Demirguc-Kunt & Enrica Detragiache, 2000. "Does Deposit Insurance Increase Banking System Stability? An Empirical Investigation," Econometric Society World Congress 2000 Contributed Papers 1751, Econometric Society.
  2. Asli Demirguc-Kunt & Edward J. Kane & Luc Laeven, 2007. "Determinants of Deposit-Insurance Adoption and Design," NBER Working Papers 12862, National Bureau of Economic Research, Inc.
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Cited by:
  1. Benjamin M. Tabak & Dimas M. Fazio & Daniel O. Cajueiro, 2011. "The Relationship Between Banking Market Competition and Risk-taking: Do Size and Capitalization Matter?," Working Papers Series 261, Central Bank of Brazil, Research Department.
  2. Crowley , Patrick M & Hughes Hallett, Andrew, 2011. "The great moderation under the microscope: decomposition of macroeconomic cycles in US and UK aggregate demand," Research Discussion Papers 13/2011, Bank of Finland.

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