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Title:Are bank shareholders enemies of regulators or a potential source of market discipline? PDF Logo
Authors:Park, Sangkyun
Peristiani, Stavros
Issue Date:2001
Series/Report no.:Staff Report, Federal Reserve Bank of New York 138
Abstract:In moral hazard models, bank shareholders have incentives to transfer wealth from the deposit insurer - that is, maximize put option value - by pursuing riskier strategies. For safe banks with large charter value, however, the risk-taking incentive is outweighed by the possibility of losing charter value. Focusing on the relationship between book value, market value, and a risk measure, this paper develops a semi-parametric model for estimating the critical level of bank risk at which put option value starts to dominate charter value. From these estimates, we infer the extent to which the risk-taking incentive prevailed during 1986-92, a period characterized by serious banking problems and financial turmoil. We find that despite the difficult financial environment, shareholders' risk-taking incentive was confined primarily to a small fraction of highly risky banks.
JEL:G21
G28
Document Type:Working Paper
Appears in Collections:Staff Reports, Federal Reserve Bank of New York

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