Conventional wisdom states that large banks are safer than small banks because they can diversify more. This conventional wisdom, however, confuses risk with probability of failure. While the law of large numbers does imply that a large bank is less likely to fail than a small bank, equating this tendency with lower risk falls into what Samuelson [1963] termed the fallacy of large numbers. A $1...

Banks are required to hold capital primarily as a buffer against future losses and in order to reduce the exposure of the deposit insurer. However, as regulators and researchers have recognized, changes in capital requirements also affect bank portfolio behavior. It is possible that increased capital requirements may lead banks to increase their riskiness and thus increase their expected losses...

Article history: Received 25 May 2012 Received in revised form 2 April 2013 Accepted 26 May 2013 Available online 5 June 2013 Using data for publicly listed commercial banks and bank holding companies around the world, I investigate the disciplinary effect of subordinated debt on bank risk taking in the period 2002– 2008. In addition, I examinewhether this effect depends on national bank regula...

Employing the one-step stochastic frontier analysis (SFA) approach, this paper examines bank efficiency in China, paying special attention to the ownership, selection effect and dynamic effects of governance changes on bank performance. Bank efficiency has improved over the data period 1995-2008. The estimated average cost and profit efficiencies are 74% and 63% respectively. Joint Stock Commer...

We seek to assess the effect of commercial property price movements on the behaviour and performance of individual banks in a range of industrialised economies, extending the existing micro literature on bank performance. Our results suggest that commercial property prices tend to be positively associated with bank lending and profitability, and negatively associated with banks’ net interest ma...

Based on evidence for 61 countries in 1980-97, this study finds that explicit deposit insurance tends to increase the likelihood of banking crises, the more so where bank interest rates are deregulated and the institutional environment is weak. Also, the adverse impact of deposit insurance on bank stability tends to be stronger the more extensive is the coverage offered to depositors, where the...

We consider the optimality of various institutional arrangements for agencies that conduct macro-prudential regulation and monetary policy. When a central bank is in charge of price and financial stability, a new time inconsistency problem may arise. Ex-ante, the central bank chooses the socially optimal level of inflation. Ex-post, however, the central bank chooses inflation above the social o...

We study the endogenous information acquisition and withdrawal-redeposit decisions of individual agents when a liquidity event triggers a spreading rumor and therefore exposes a bank to a run. Uncertainty about the bank’s liquidity and potential failure motivates agents who hear the rumor to acquire additional information. Although the bank run equilibrium is unique given the additional signal’...

We examine the relationship between the number of bank relationships and firms’ performance, evaluating possible differential effects related to firms’ size. Our sample of firms from Italy includes many small firms, 99 percent of which are not listed and for which bank debt is a major source of financing. In the sample, 4 percent of the firms have a single bank relationship, and 66 percent of t...

China has accelerated and deepened bank reform since it joined the WTO in 2001. Employing a stochastic distance function, this paper investigates the technical efficiency of banks and examines the static, selection and dynamic effects of governance changes on bank efficiency in China for the period 1995-2005. Our results show that bank efficiency has been improved and state-owned banks still pe...