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Moral hazard and the financial structure of banks

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  • Duran, Miguel A.
  • Lozano-Vivas, Ana

Abstract

This paper analyzes whether risk shifting took place in the European Union’s banking sector in 2002–2009. We also identify the type of risk shifting, if any, in the sample. In addition, our method provides a way to determine which variables incentivize/disincentivize risk shifting. Our main findings suggest that banks shifted risk to non-depository creditors. As regards banking policy, the analysis indicates that (i) the three pillars of Basel II do not seem to be effective in controlling risk shifting incentives, (ii) generous deposit insurance schemes seem to incentivize risk shifting, and (iii) in tune with the new rules on conservation buffers in Basel III, incentives to shift risk seem to be weaker in banks with a capital buffer.

Suggested Citation

  • Duran, Miguel A. & Lozano-Vivas, Ana, 2015. "Moral hazard and the financial structure of banks," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 34(C), pages 28-40.
  • Handle: RePEc:eee:intfin:v:34:y:2015:i:c:p:28-40
    DOI: 10.1016/j.intfin.2014.10.005
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    References listed on IDEAS

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    Cited by:

    1. Svatopluk Kapounek, 2017. "The Impact of Institutional Quality on Bank Lending Activity: Evidence from Bayesian Model Averaging," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 67(5), pages 372-395, October.
    2. repec:eee:intfin:v:50:y:2017:i:c:p:219-234 is not listed on IDEAS

    More about this item

    Keywords

    Bank risk; Financial structure; Moral hazard; Risk shifting;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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