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Excessive risk-taking by banks is often associated with economic recession. A key question for policy and for the academic literature is why banks take excessive risk. There are two (non-mutually-exclusive) views. First, the moral hazard view implies that conflicts of interest (agency problems) between bank shareholders/managers and bank debt ...
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Aug 27, 2020 · Second, the behavioural view states that banks take excessive risks because they neglect the possibility of extreme events (unlikely tail risks) or have over-optimistic beliefs. In the extreme end of this view, banks were not aware of their excessive risk-taking prior to the crisis. One empirical way to analyse these issues is to document what ...
anticipate that their excessive risk-taking may lead to problems) may exacerbate conflicts of interest. Banning trading by bank insiders may endogenously result in lower excessive risk-taking by banks and operate as a partial substitute for bank capital regulation or macroprudential policies. But banning trading by bank insiders on these grounds
Banning trading by bank insiders may endogenously result in lower excessive risk-taking by banks and operate as a partial substitute for bank capital regulation or macroprudential policies. But banning trading by bank insiders on these grounds would not be fully justified as there are many other costs and benefits involved that should be considered.
Excessive risk-taking by banks is widely blamed as a primary factor behind the financial meltdown of 2007-2008. Yet, not much work has been done on whether banks fundamentally changed their risk-taking behavior prior to the crisis, nor has much formal work been done on whether banks’ risk-taking was “excessive” in any way. In our paper, […]
Abstract. This paper investigates whether bank executives took excessive risks in the runup to the recent financial crisis by analyzing their trading in their own bank’s stock. I examine whether insiders of banks with the highest exposure to subprime risk changed their insider trading before the onset of the crisis.
People also ask
Were banks aware of their excessive risk-taking before the crisis?
Why do banks take excessive risk?
Was banks' risk-taking “excessive” prior to the financial meltdown?
Should bank insiders be banned from trading?
Did bank insiders sell their own shares during the 2007–08 crisis?
Is the level of risk assumed by banks excessive?
The informational content of bank insider trading before the crisis suggests that insiders knew that their banks were taking excessive risks, which has important implications for theory, public policy and the understanding of crises, as well as a supervisory tool for early warning signals.
