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Banks’ risk taking and creditors’ bargaining power

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  • Heller, Yuval
  • Peleg Lazar, Sharon
  • Raviv, Alon

Abstract

We study the influence of unsecured debt (subordinated debt) on banks’ risk-taking in a contingent claim model where assets are risky debt claims. We consider the bargaining between stockholders and debtholders when choosing the level of asset risk. Replacing part of a bank's stock with subordinated debt leads to risk-shifting events occurring in a narrower domain of asset values (leverage ratios), but can lead to higher levels of risk, depending on the relative bargaining power. When side payments between the bank's claimholders are possible the inclusion of subordinated debt does not affect asset risk. Moreover, we show that severe, yet infrequent, regulatory corrective measures might have adverse effects on risk-shifting.

Suggested Citation

  • Heller, Yuval & Peleg Lazar, Sharon & Raviv, Alon, 2022. "Banks’ risk taking and creditors’ bargaining power," Journal of Corporate Finance, Elsevier, vol. 74(C).
  • Handle: RePEc:eee:corfin:v:74:y:2022:i:c:s0929119922000414
    DOI: 10.1016/j.jcorpfin.2022.102198
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    1. Heller, Yuval & Peleg-Lazar, Sharon & Raviv, Alon, 2019. "A closed-form solution to the risk-taking motivation of subordinated debtholders," Economics Letters, Elsevier, vol. 181(C), pages 169-173.

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    More about this item

    Keywords

    Financial institutions; Risk-taking; Asset risk; Bargaining; Leverage; Stress test;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory

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