Journal of Financial Stability Vol. 4 No. 1 2008
Do weak supervisory systems encourage bank risk-taking?
Abstract
Weak bank supervision could give banks the ability to shift risk from themselves to supervisors. We use cross-border bank mergers as a natural experiment to test changes in risk and the impact of supervision. We examine cross-border bank mergers and find that the supervisory structures of the partners’ countries influence changes in post-merger total risk. An acquirer from a country with strong supervision lowers total risk after a cross-border merger. However, total risk increases when the target bank is located in a country with relatively strong supervision. This result is consistent with strong host regulators limiting the risky activities of their local banks. Foreign-owned competitors could then engage in the risky projects, especially if the foreign banks’ supervisors are not strong. An acquirer entering a country with strong supervision appears to shift risk back to its home country. The results suggest that bank supervisors can reduce total banking risk in their countries by being strong.
- DOI
- 10.1016/j.jfs.2007.12.002
- Volume
- 4
- Issue
- 1
- Pages
- 23-39
- Language
- en
- Sources
- bibtex:phds-export.bib crossref openalex