The impact of banking regulations, institutional environment, and negative interest rates on bank risk-taking

Abstract

This thesis makes three contributions to the literature. First, in Chapter 2, we add to the inconclusive literature on creditor rights and banking regulations regarding bank risk-taking. By using a panel dataset of commercial banks from 2004 to 2014, we find the risk-inducing impact of creditor rights and three regulatory measures (activity restrictions, capital stringency and official supervisory powers) from 2004-2014. These results propose that none of these measures by governments and regulators are sufficient to manage bank risk over the long run. we perform some post-crisis analysis and find that while the risk-inducing impact of creditor rights weakens after the crisis, bank regulations help mitigate banks' excessive risk-taking behaviour. These findings suggest that either bank became more risk-averse after the crisis or bank regulations became more effective around this time. Second, in Chapter 3, we contribute by addressing the scant literature on institutional environment and bank risk. In this area, we also contribute by using more advanced econometric methodologies (fixed effects and two-step system generalized method of moments) compared to existing literature (Ordinary Least Squares and Generalized Least Squares. We find that most of the WGIs (Voice & Accountability, Government Effectiveness, Regulatory Quality, Rule of Law and Control of Corruption) are helpful in reducing risk-taking behavior of banks. However, the magnitude is different for each of them. The only exception is political stability (PS), for which we find the opposing effect. These results suggest that paying attention to individual components of WGIs is important while improving the overall institutional quality of the country. Finally, in Chapter 4, we investigate banks' risk-taking behaviour in a negative interest rate environment. First, we contribute to the literature by employing only countries that adopted negative policy rates in 2014, while existing studies examined all countries that adopted negative rates in different years. Using a homogenous treatment year can provide a better analysis of heterogeneous treatment. We find that banks have not increased their risk-taking across European countries since their implementation. These findings suggest that negative rate policies serve the purpose they were designed for. In addition, we contribute by exploring this relationship based on types of banks such as commercial banks, cooperative banks, and savings banks. We find that while commercial banks tend to take more risks, savings banks exhibit more prudent behaviour. The behaviour of cooperative banks is unclear since they show the characteristics of both risk avoidance and risk-seeking.