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Title:Are private banks the better banks? An insight into the principal-agent structure and risk-taking behavior of German banks PDF Logo
Authors:Schmielewski, Frank
Wein, Thomas
Issue Date:2012
Series/Report no.:University of Lüneburg Working Paper Series in Economics 236
Abstract:In this study, we propose our hypothesis that the distinguishable principal-agent relationships of German banks are significantly influencing the risk-taking attitudes of bank managers. Particularly, we intend to substantiate the theory that banks owned by dispersed shareholders or federal state authorities face a higher relevance of principal-agent problems than other banking sectors due to a missing ability to monitor bank managers. Our results underline that these problems appear to mislead bank managers showing an unreasonable risk-taking behavior. In a first stage, we rely on a theoretical model explaining that from the bank owners' viewpoint three factors of the principal-agent relationships are determining the probability of choosing the optimal portfolio of risky assets. These factors cover the ability to control bank managers, the risk pooling capabilities of bank owners and bank managers, and the incentives of seeking high returns. To support our hypothesis we apply an empirical study to the distances-to-default of different German banking sectors. This demonstrates that risktaking attitudes of banks are closely related to banks' ownership. Consequently, our findings offer evidence, that legislative and regulatory authorities should increase their vigilance in terms of principal-agent problems within certain sectors of the banking industry.
Subjects:financial crises
risk-taking behavior
risk aversion
efficient portfolios
information asymmetries and market efficiency
government policy and regulation
risk pooling
seeking for high returns
monitoring capabilities
capital and ownership structure
distance-to-default
capital asset ratio
return on assets
JEL:G01
G12
G14
G28
G15
G32
Document Type:Working Paper
Appears in Collections:Working Paper Series in Economics, Leuphana Universität Lüneburg

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