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Risk mitigating versus risk shifting: Evidence from banks security trading in crises

Author

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  • Peydró, José-Luis
  • Polo, Andrea
  • Sette, Enrico
  • Vanasco, Victoria
Abstract
We show that risk-mitigating incentives dominate risk-shifting incentives in fragile banks. We study security trading by banks, as banks can easily and quickly change their risk exposure within their security portfolio. For identification, we exploit different crisis shocks and supervisory ISIN-bank-month-level data. Less capitalized banks take relatively less risk after financial stress shocks. Results hold within identical regulatory capital risk weights categories. Moreover, additional tests suggest that banks’ own incentives, rather than supervision, are the main drivers. Results hold for the different crisis shocks since 2007/08, including the COVID-19 one. A model of bank behavior rationalizes our findings.

Suggested Citation

  • Peydró, José-Luis & Polo, Andrea & Sette, Enrico & Vanasco, Victoria, 2023. "Risk mitigating versus risk shifting: Evidence from banks security trading in crises," EconStor Preprints 226219, ZBW - Leibniz Information Centre for Economics.
    • Handle: RePEc:zbw:esprep:226219
    DOI: 10.2139/ssrn.3732831
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    Cited by:

    1. Kirti, Divya, 2024. "When gambling for resurrection is too risky," Journal of Banking & Finance, Elsevier, vol. 162(C).
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    3. John Krainer & Pascal Paul, 2023. "Monetary Transmission through Bank Securities Portfolios," Working Paper Series 2023-18, Federal Reserve Bank of San Francisco.
    4. Stefan Avdjiev & José María Serena Garralda, 2020. "Regulatory capital, market capital and risk taking in international bank lending," BIS Working Papers 912, Bank for International Settlements.

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    More about this item

    Keywords

    risk shifting; financial crises; securities; bank capital; reach for yield; uncertainty; risk weights; supervision; franchise value; COVID-19;
    All these keywords.

    JEL classification:

    • G00 - Financial Economics - - General - - - General
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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