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Bank capital and risk-taking: evidence from misconduct provisions

Author

Listed:
  • Tracey, Belinda

    () (Bank of England)

  • Schnittker, Christian

    () (Bank of England)

  • Sowerbutts, Rhiannon

    () (Bank of England)

Abstract

We use provisions for misconduct issues as an instrumental variable to identify the causal effect of bank capital on risk-taking. Misconduct provisions can adversely affect bank capital via their negative impact on retained earnings, and we find evidence of this for UK banks. We also find strong support for our assumption that misconduct provisions are otherwise unrelated to risk-taking. We facilitate our analysis with a new UK panel dataset of bank-level information including misconduct provisions, merged with loan-level data on all regulated UK mortgages. Our main finding is that a negative bank capital shock leads to an increase in risk-taking.

Suggested Citation

  • Tracey, Belinda & Schnittker, Christian & Sowerbutts, Rhiannon, 2017. "Bank capital and risk-taking: evidence from misconduct provisions," Bank of England working papers 671, Bank of England.
  • Handle: RePEc:boe:boeewp:0671
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Banking; risk-taking; capital shocks; 2SLS;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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