Banks use different risk management practices with varying levels of sophistication. This paper examines the factors that determine the choice of risk-management practices. In a theoretical model, we identify two main determinants for the choice of risk management tools: bank competition and sector concentration in the loan market. We empirically test the predictions of our model using hand-collected data on the credit risk management of 249 German savings banks. The results are in line with our theory: Competition pushes banks to implement advanced risk management practices. Sector concentration in the loan market promotes credit portfolio modeling, but it inhibits credit risk transfer.

Investment funds hold disproportionately more domestic than foreign stocks, which has been attributed to stock market development and familiarity factors such as language and distance. However, the literature typically assumes that funds represent investors in their country of incorporation, neglecting the substantial allocation of investors’ assets to foreign funds domiciled in financial centers. Using a novel “look-through approach” that combines supervisory holdings statistics with granular security-level fund portfolios, we provide a more accurate view of investors’ indirect equity allocations, independent of the fund’s legal country of incorporation. Our findings reveal three key insights. First, home bias estimates are significantly smaller than previously documented, reflecting greater geographical portfolio diversification through investment funds. Second, in most euro area countries, home bias is primarily driven by country-specific rather than common-currency preferences. Third, familiarity plays a larger role in cross-border investments for households than for institutional fund investors, highlighting the importance of investor sophistication.

This paper tests whether an increase in insured deposits causes banks to become more risky. We use variation introduced by the U.S. Emergency Economic Stabilization Act in October 2008, which increased the deposit insurance coverage from 100,000 to 250,000 per depositor and bank. For some banks, the amount of insured deposits increased significantly; for others, it was a minor change. Our analysis shows that the more affected banks increase their investments in risky commercial real estate loans and become more risky relative to unaffected banks following the change. This effect is most distinct for affected banks that are low capitalized.

This paper explores how banks react to an exogenous shock caused by Hurricane Katrina in 2005, and how the structure of the banking system affects economic development following the shock. Independent banks based in the disaster areas increase their risk-based capital ratios after the hurricane, while those that are part of a bank holding company on average do not. The effect on independent banks mainly comes from the subgroup of highly capitalized banks. These independent and highly capitalized banks increase their holdings in government securities and reduce their total loan exposures to non-financial firms, while also increasing new lending to these firms. With regard to local economic development, affected counties with a relatively large share of independent banks and relatively high average bank capital ratios show higher economic growth than other affected counties following the catastrophic event.