Banks’ risk taking and creditors’ bargaining power

Yuval Heller, Sharon Peleg Lazar, Alon Raviv

Research output: Contribution to journalArticlepeer-review

2 Scopus citations

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.

Original languageEnglish
Article number102198
JournalJournal of Corporate Finance
Volume74
DOIs
StatePublished - Jun 2022

Bibliographical note

Publisher Copyright:
© 2022 Elsevier B.V.

Funding

The authors would like to express their deep gratitude to Yaron Leitner, Nittai Bergman, participants at 2019 European meeting of the Econometric Society, IRMC 2020 annual meeting, FEBS 2019 annual meeting and the 2018 meeting of the Israel Economic Association as well as to seminar audiences at Tel Aviv University and Bar Ilan University for many useful comments. All authors gratefully acknowledge the financial support of the Israeli Science Foundation (#2443/19). YH gratefully acknowledges the financial support of the European Research Council (#677057). The authors would like to express their deep gratitude to Yaron Leitner, Nittai Bergman, participants at 2019 European meeting of the Econometric Society, IRMC 2020 annual meeting, FEBS 2019 annual meeting and the 2018 meeting of the Israel Economic Association as well as to seminar audiences at Tel Aviv University and Bar Ilan University for many useful comments. All authors gratefully acknowledge the financial support of the Israeli Science Foundation ( #2443/19 ). YH gratefully acknowledges the financial support of the European Research Council ( #677057 ).

FundersFunder number
Econometric Society
Israel Economic Association
Information Resources Management College
Horizon 2020 Framework Programme677057
European Commission
Israel Science Foundation2443/19
Tel Aviv University

    Keywords

    • Asset risk
    • Bargaining
    • Financial institutions
    • Leverage
    • Risk-taking
    • Stress test

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