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Bank Governance, Regulation, and Risk Taking

  • Luc Laeven
  • Ross Levine

This paper conducts the first empirical assessment of theories concerning relationships among risk taking by banks, their ownership structures, and national bank regulations. We focus on conflicts between bank managers and owners over risk, and show that bank risk taking varies positively with the comparative power of shareholders within the corporate governance structure of each bank. Moreover, we show that the relation between bank risk and capital regulations, deposit insurance policies, and restrictions on bank activities depends critically on each bank's ownership structure, such that the actual sign of the marginal effect of regulation on risk varies with ownership concentration. These findings have important policy implications as they imply that the same regulation will have different effects on bank risk taking depending on the bank's corporate governance structure.

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File URL: http://www.nber.org/papers/w14113.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14113.

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Date of creation: Jun 2008
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Publication status: published as Laeven, Luc & Levine, Ross, 2009. "Bank governance, regulation and risk taking," Journal of Financial Economics, Elsevier, vol. 93(2), pages 259-275, August.
Handle: RePEc:nbr:nberwo:14113
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