Risk-taking by banks: What did we know and when did we know it?
نویسنده
چکیده
The systematic risk of US commercial bank stocks more than doubled from 2000 to 2006, primarily due to their increased residential mortgage exposure. Higher levels of mortgage lending produced better earnings but relatively lower stock returns. Banks engaged heavily in mortgage lending encountered less enthusiastic market response to their earnings announcements, suggesting that financial markets did not view increased earnings as permanent or credible. Banks with less credible earnings during the pre-crisis period also experienced higher mortgage defaults in 2007 and 2008. Senior managers, rewarded primarily for earnings growth, had incentives to engage in risky lending. Our analysis provides strong support for the view that even though financial markets were able to identify banks engaging in excessive risky lending activity long before the onset of the financial crisis, managerial compensation schemes failed to respond to this information effectively.
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