IDEAS home Printed from https://ideas.repec.org/a/bla/jfnres/v47y2024i2p275-315.html

Lending and risk controls for BHCs after the Dodd–Frank act

Author

Listed:
  • Marta Degl'Innocenti
  • Si Zhou
  • Yue Zhou

Abstract

We investigate the impact of the Dodd–Frank Act (DFA) on the credit risk behavior of complex bank holding companies (BHCs). Specifically, we assess the effectiveness of the DFA in reducing the credit riskiness of complex banks. Consistent with the moral hazard hypothesis, we find that complex BHCs affected by the DFA increase their credit risk. We argue that possible explanations are that BHCs decreased their lending portfolio quality, loan monitoring, and strength and independence of the risk management function after the DFA. The results are robust to endogeneity concerns, different sample selection criteria, various model and treatment specifications, and placebo tests.

Suggested Citation

  • Marta Degl'Innocenti & Si Zhou & Yue Zhou, 2024. "Lending and risk controls for BHCs after the Dodd–Frank act," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 47(2), pages 275-315, June.
    • Handle: RePEc:bla:jfnres:v:47:y:2024:i:2:p:275-315
    DOI: 10.1111/jfir.12363
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/jfir.12363
    Download Restriction: no
    File URL: https://libkey.io/10.1111/jfir.12363?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
    ---><---

    References listed on IDEAS

    as
    1. Goetz, Martin R. & Laeven, Luc & Levine, Ross, 2016. "Does the geographic expansion of banks reduce risk?," Journal of Financial Economics, Elsevier, vol. 120(2), pages 346-362.
    2. Acharya, Viral V., 2009. "A theory of systemic risk and design of prudential bank regulation," Journal of Financial Stability, Elsevier, vol. 5(3), pages 224-255, September.
    3. Tobias Berg & Anthony Saunders & Sascha Steffen, 2016. "The Total Cost of Corporate Borrowing in the Loan Market: Don't Ignore the Fees," Journal of Finance, American Finance Association, vol. 71(3), pages 1357-1392, June.
    4. Elyas Elyasiani & Sotiris K. Staikouras & Panagiotis Dontis-Charitos, 2016. "Cross-Industry Product Diversification and Contagion in Risk and Return: The case of Bank-Insurance and Insurance-Bank Takeovers," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 83(3), pages 681-718, September.
    5. Duchin, Ran & Sosyura, Denis, 2014. "Safer ratios, riskier portfolios: Banks׳ response to government aid," Journal of Financial Economics, Elsevier, vol. 113(1), pages 1-28.
    6. Ertugrul, Mine & Lei, Jin & Qiu, Jiaping & Wan, Chi, 2017. "Annual Report Readability, Tone Ambiguity, and the Cost of Borrowing," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 52(2), pages 811-836, April.
    7. Berger, Allen N. & Bouwman, Christa H.S., 2013. "How does capital affect bank performance during financial crises?," Journal of Financial Economics, Elsevier, vol. 109(1), pages 146-176.
    8. Bouwman, Christa H.S. & Hu, Shuting (Sophia) & Johnson, Shane A., 2018. "Differential bank behaviors around the Dodd–Frank Act size thresholds," Journal of Financial Intermediation, Elsevier, vol. 34(C), pages 47-57.
    9. Vallascas, Francesco & Hagendorff, Jens, 2011. "The impact of European bank mergers on bidder default risk," Journal of Banking & Finance, Elsevier, vol. 35(4), pages 902-915, April.
    10. Sudheer Chava & Robert A. Jarrow, 2008. "Bankruptcy Prediction with Industry Effects," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 21, pages 517-549, World Scientific Publishing Co. Pte. Ltd..
    11. Nicola Cetorelli & James J. McAndrews & James Traina, 2014. "Evolution in bank complexity," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 85-106.
    12. Gustafson, Matthew T. & Ivanov, Ivan T. & Meisenzahl, Ralf R., 2021. "Bank monitoring: Evidence from syndicated loans," Journal of Financial Economics, Elsevier, vol. 139(2), pages 452-477.
    13. Weiß, Gregor N.F. & Neumann, Sascha & Bostandzic, Denefa, 2014. "Systemic risk and bank consolidation: International evidence," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 165-181.
    14. Acharya, Viral V. & Berger, Allen N. & Roman, Raluca A., 2018. "Lending implications of U.S. bank stress tests: Costs or benefits?," Journal of Financial Intermediation, Elsevier, vol. 34(C), pages 58-90.
    15. Penas, Maria Fabiana & Unal, Haluk, 2004. "Gains in bank mergers: Evidence from the bond markets," Journal of Financial Economics, Elsevier, vol. 74(1), pages 149-179, October.
    16. Barbara Casu & Panagiotis Dontis†Charitos & Sotiris Staikouras & Jonathan Williams, 2016. "Diversification, Size and Risk: the Case of Bank Acquisitions of Nonbank Financial Firms," European Financial Management, European Financial Management Association, vol. 22(2), pages 235-275, March.
    17. Priyank Gandhi & Hanno Lustig, 2015. "Size Anomalies in U.S. Bank Stock Returns," Journal of Finance, American Finance Association, vol. 70(2), pages 733-768, April.
    18. Lammertjan Dam & Michael Koetter, 2012. "Bank Bailouts and Moral Hazard: Evidence from Germany," The Review of Financial Studies, Society for Financial Studies, vol. 25(8), pages 2343-2380.
    19. Indraneel Chakraborty & Itay Goldstein & Andrew MacKinlay, 2018. "Housing Price Booms and Crowding-Out Effects in Bank Lending," The Review of Financial Studies, Society for Financial Studies, vol. 31(7), pages 2806-2853.
    20. 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.
    21. Berger, Allen N. & Roman, Raluca A., 2017. "Did Saving Wall Street Really Save Main Street? The Real Effects of TARP on Local Economic Conditions," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 52(5), pages 1827-1867, October.
    22. Baele, Lieven & De Jonghe, Olivier & Vander Vennet, Rudi, 2007. "Does the stock market value bank diversification?," Journal of Banking & Finance, Elsevier, vol. 31(7), pages 1999-2023, July.
    23. Andriosopoulos, Kostas & Chan, Ka Kei & Dontis-Charitos, Panagiotis & Staikouras, Sotiris K., 2017. "Wealth and risk implications of the Dodd-Frank Act on the U.S. financial intermediaries," Journal of Financial Stability, Elsevier, vol. 33(C), pages 366-379.
    24. Bengt Holmstrom & Jean Tirole, 1997. "Financial Intermediation, Loanable Funds, and The Real Sector," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(3), pages 663-691.
    25. Oliver Hart & Luigi Zingales, 2011. "A New Capital Regulation for Large Financial Institutions," American Law and Economics Review, American Law and Economics Association, vol. 13(2), pages 453-490.
    26. Allen N. Berger & Sadok El Ghoul & Omrane Guedhami & Raluca A. Roman, 2017. "Internationalization and Bank Risk," Management Science, INFORMS, vol. 63(7), pages 2283-2301, July.
    27. Jones, Jeffrey S. & Lee, Wayne Y. & Yeager, Timothy J., 2012. "Opaque banks, price discovery, and financial instability," Journal of Financial Intermediation, Elsevier, vol. 21(3), pages 383-408.
    28. Lin, Chen & Ma, Yue & Malatesta, Paul & Xuan, Yuhai, 2012. "Corporate ownership structure and bank loan syndicate structure," Journal of Financial Economics, Elsevier, vol. 104(1), pages 1-22.
    29. Nicola Cetorelli & Linda S. Goldberg, 2014. "Measures of global bank complexity," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 107-126.
    30. Levine,Ross Eric, 2004. "The Corporate Governance of Banks - a concise discussion of concepts and evidence," Policy Research Working Paper Series 3404, The World Bank.
    31. Rebel Cole & Lawrence White, 2012. "Déjà Vu All Over Again: The Causes of U.S. Commercial Bank Failures This Time Around," Journal of Financial Services Research, Springer;Western Finance Association, vol. 42(1), pages 5-29, October.
    32. Zahn Bozanic & Maria Loumioti & Florin P. Vasvari, 2018. "Corporate Loan Securitization and the Standardization of Financial Covenants," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 56(1), pages 45-83, March.
    33. Hamid Mehran & Alan Morrison & Joel Shapiro, 2011. "Corporate governance and banks: what have we learned from the financial crisis?," Staff Reports 502, Federal Reserve Bank of New York.
    34. Degl’Innocenti, Marta & Frigerio, Marco & Zhou, Si, 2022. "Development banks and the syndicate structure: Evidence from a world sample," Journal of Empirical Finance, Elsevier, vol. 66(C), pages 99-120.
    35. Viral V. Acharya & Hamid Mehran & Anjan V. Thakor, 2016. "Caught between Scylla and Charybdis? Regulating Bank Leverage When There Is Rent Seeking and Risk Shifting," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 5(1), pages 36-75.
    36. He, Wen & Hu, Maggie (Rong), 2016. "Religion and bank loan terms," Journal of Banking & Finance, Elsevier, vol. 64(C), pages 205-215.
    37. Dafna Avraham & Patricia Selvaggi & James Vickery, 2012. "A Structural view of U.S. bank holding companies," Economic Policy Review, Federal Reserve Bank of New York, issue 07, pages 65-81.
    38. Berger, Allen N. & Bouwman, Christa H.S. & Kick, Thomas & Schaeck, Klaus, 2016. "Bank liquidity creation following regulatory interventions and capital support," Journal of Financial Intermediation, Elsevier, vol. 26(C), pages 115-141.
    39. Jones, Jeffrey S. & Lee, Wayne Y. & Yeager, Timothy J., 2013. "Valuation and systemic risk consequences of bank opacity," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 693-706.
    40. Amir Sufi, 2007. "Information Asymmetry and Financing Arrangements: Evidence from Syndicated Loans," Journal of Finance, American Finance Association, vol. 62(2), pages 629-668, April.
    41. Balasubramnian, Bhanu & Cyree, Ken B., 2014. "Has market discipline on banks improved after the Dodd–Frank Act?," Journal of Banking & Finance, Elsevier, vol. 41(C), pages 155-166.
    42. Calem, Paul & Rob, Rafael, 1999. "The Impact of Capital-Based Regulation on Bank Risk-Taking," Journal of Financial Intermediation, Elsevier, vol. 8(4), pages 317-352, October.
    43. Merton, Robert C., 1977. "An analytic derivation of the cost of deposit insurance and loan guarantees An application of modern option pricing theory," Journal of Banking & Finance, Elsevier, vol. 1(1), pages 3-11, June.
    44. Nicola Cetorelli & Linda S. Goldberg, 2016. "Organizational Complexity and Balance Sheet Management in Global Banks," NBER Working Papers 22169, National Bureau of Economic Research, Inc.
    45. Michael Bradley & Michael R. Roberts, 2015. "The Structure and Pricing of Corporate Debt Covenants," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 5(02), pages 1-37.
    46. Deng, Saiying & Mao, Connie X. & Xia, Cong, 2021. "Bank Geographic Diversification and Corporate Innovation: Evidence from the Lending Channel," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 56(3), pages 1065-1096, May.
    47. Smith, Clifford Jr. & Warner, Jerold B., 1979. "On financial contracting : An analysis of bond covenants," Journal of Financial Economics, Elsevier, vol. 7(2), pages 117-161, June.
    48. Carmassi, Jacopo & Herring, Richard, 2016. "The Corporate Complexity of Global Systemically Important Banks," Working Papers 16-09, University of Pennsylvania, Wharton School, Weiss Center.
    49. Donald P. Morgan, 2002. "Rating Banks: Risk and Uncertainty in an Opaque Industry," American Economic Review, American Economic Association, vol. 92(4), pages 874-888, September.
    50. 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.
    51. Correa, Ricardo & Goldberg, Linda S., 2022. "Bank complexity, governance, and risk," Journal of Banking & Finance, Elsevier, vol. 134(C).
    52. Jacopo Carmassi & Richard Herring, 2016. "The Corporate Complexity of Global Systemically Important Banks," Journal of Financial Services Research, Springer;Western Finance Association, vol. 49(2), pages 175-201, June.
    53. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
    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. Hailey B. Ballew & Amy G. Sheneman, 2025. "Regulatory consulting and banks’ financial reporting quality: evidence from the Dodd-Frank Act," Review of Accounting Studies, Springer, vol. 30(4), pages 3719-3764, December.

    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. Degl'Innocenti, Marta & Fiordelisi, Franco & Song, Wei & Zhou, Si, 2023. "Shareholder litigation and bank risk," Journal of Banking & Finance, Elsevier, vol. 146(C).
    2. Correa, Ricardo & Goldberg, Linda S., 2022. "Bank complexity, governance, and risk," Journal of Banking & Finance, Elsevier, vol. 134(C).
    3. Claudia M. Buch & Linda S. Goldberg, 2021. "Complexity and Riskiness of Banking Organizations: Evidence from the International Banking Research Network," Staff Reports 966, Federal Reserve Bank of New York.
    4. Chronopoulos, Dimitris K. & Wilson, John O.S. & Yilmaz, Muhammed H., 2023. "Regulatory oversight and bank risk," Journal of Financial Stability, Elsevier, vol. 64(C).
    5. Nyola, Annick Pamen & Sauviat, Alain & Tarazi, Amine & Danisman, Gamze Ozturk, 2021. "How organizational and geographic complexity influence performance: Evidence from European banks," Journal of Financial Stability, Elsevier, vol. 55(C).
    6. Flood, Mark D. & Kenett, Dror Y. & Lumsdaine, Robin L. & Simon, Jonathan K., 2020. "The Complexity of Bank Holding Companies: A Topological Approach," Journal of Banking & Finance, Elsevier, vol. 118(C).
    7. Martynova, Natalya & Vogel, Ursula, 2022. "Banks’ complexity-risk nexus and the role of regulation," Journal of Banking & Finance, Elsevier, vol. 134(C).
    8. Argimón, Isabel & Rodríguez-Moreno, María, 2022. "Risk and control in complex banking groups," Journal of Banking & Finance, Elsevier, vol. 134(C).
    9. Allen N. Berger & Raluca Roman & John Sedunov, 2016. "Do bank bailouts reduce or increase systemic risk? the effects of TARP on financial system stability," Research Working Paper RWP 16-8, Federal Reserve Bank of Kansas City.
    10. Berger, Allen N. & Bouwman, Christa H.S., 2013. "How does capital affect bank performance during financial crises?," Journal of Financial Economics, Elsevier, vol. 109(1), pages 146-176.
    11. Acharya, Viral V. & Berger, Allen N. & Roman, Raluca A., 2018. "Lending implications of U.S. bank stress tests: Costs or benefits?," Journal of Financial Intermediation, Elsevier, vol. 34(C), pages 58-90.
    12. Allen N. Berger, 2018. "The Benefits and Costs of the TARP Bailouts: A Critical Assessment," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 8(02), pages 1-29, June.
    13. Anani, Makafui, 2024. "Geographic complexity and bank risk: Evidence from cross-border banks in Africa," Economic Systems, Elsevier, vol. 48(3).
    14. Andriosopoulos, Kostas & Chan, Ka Kei & Dontis-Charitos, Panagiotis & Staikouras, Sotiris K., 2017. "Wealth and risk implications of the Dodd-Frank Act on the U.S. financial intermediaries," Journal of Financial Stability, Elsevier, vol. 33(C), pages 366-379.
    15. Aldasoro, Iñaki & Hardy, Bryan & Jager, Maximilian, 2022. "The Janus face of bank geographic complexity," Journal of Banking & Finance, Elsevier, vol. 134(C).
    16. Leung, Woon Sau & Song, Wei & Chen, Jie, 2019. "Does bank stakeholder orientation enhance financial stability?," Journal of Corporate Finance, Elsevier, vol. 56(C), pages 38-63.
    17. Roman, Raluca A., 2020. "Winners and losers from supervisory enforcement actions against banks," Journal of Corporate Finance, Elsevier, vol. 60(C).
    18. Allen N. Berger & Tanakorn Makaew & Raluca Roman, 2015. "Did bank borrowers benefit from the TARP program : the effects of TARP on loan contract terms," Research Working Paper RWP 15-11, Federal Reserve Bank of Kansas City.
    19. Pham, Thi Hoang Anh & Doan, Ngoc Thang, 2023. "Global bank complexity and financial fragility around the world," Economic Systems, Elsevier, vol. 47(1).
    20. Tripathy, Niranjan & Wu, Da & Zheng, Yi, 2021. "Dividends and financial health: Evidence from U.S. bank holding companies," Journal of Corporate Finance, Elsevier, vol. 66(C).

    More about this item

    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:bla:jfnres:v:47:y:2024:i:2:p:275-315. 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: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/sfaaaea.html .

    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.