Mamiza Haq

Market Discipline and Bank Risk Taking

This paper explores the impact of market discipline on bank risk taking. We examine a broad sample of financial institutions from the G7 nations over the period 1996–2010. We apply System Generalized Method of Moments estimation to control for endogeneity and other unobserved heterogeneity in a dynamic panel setting. Our analysis suggests that market discipline helps reduce bank risk (both equity and credit risk). Moreover, we find that this negative impact of market discipline is stronger: (a) in the presence of a risk-adjusted insurance premium; and (b) during the post-global financial crisis period. However, the disciplinary effect of market discipline is not enhanced in the presence of bank capital. We highlight the policy implications of these findings.

Does Skin in the Game Help? Bank Franchise Value, Managerial Incentives and ‘Going for Broke’

The roles bank franchise value (‘skin in the game’) and CEO ownership play in determining bank risk are studied for large United States Bank Holding Companies. We find robust evidence of a convex relation between bank risk and each of CEO shareholding and franchise value, indicating that increases in each are initially risk decreasing, but as franchise value and CEO ownership increases so too does bank risk. Further, we find that low levels of franchise value combined with high CEO ownership result in managerial incentives aligning with those of shareholders, resulting in increased bank risk (‘going for broke’ or asset substitution). We argue that these results are consistent with those of Robert Merton, but in the context of franchise value rather than bank capital and deposit insurance, and accordingly offer some policy recommendations for regulatory monitoring of bank risk that are consistent with these results.

Managerial Incentives, Market Power and Bank Risk-Taking

We investigate the effects of managerial incentives and market power on bank risk-taking for a sample of 212 large U.S. bank holding companies over the period 1997-2004 (comprising 1,534 observations). Bank managers have incentives to prefer less risk, while bank shareholders prefer higher risk, and market power is the centerpiece of any bank regulation. However, the literature is inconclusive regarding the effects of managerial incentives and market power on bank risk-taking. Our results reveal a U-shaped relationship between bank risk-taking and CEO ownership (a proxy for managerial incentives) and between bank risk-taking and charter value (a proxy for market power). Particularly, we find that bank risk-taking initially decreases and then increases with both CEO ownership and charter value. These convex relations are robust for various bank risk-taking proxies, different estimation approaches to account for endogeneity, and several bank-specific control variables.

Does market discipline impact bank charter value? The case for Australia and Canada

This paper analyses the relationship between market discipline and bank charter value using a panel dataset of publicly-listed domestic banks in Australia and Canada over the 1995-2011 periods, with particular focus on the 2007/2008 global financial crisis (GFC). Overall, our results show a positive relationship between market discipline and bank charter value, although this has reduced in the post-GFC period. Furthermore, our findings reveal that in the presence of market discipline, bank capital, contingent liabilities, and non-interest income are important sources of charter value. These findings have important policy implications related to bank safety and soundness. The results are robust to model specification.

The risk implication of Sarbanes-Oxley Act of 2002: an empirical examination of the US financial services industry

This article examines the risk effect of the Sarbanes-Oxley Act of 2002 (SOX) for the US financial services (FS) industry. The major provisions of SOX relate to increased transparency of the financial reporting system and improved internal governance of firms. The overall results support that SOX reduced the total risk and idiosyncratic risk of FS firms, particularly of banks, savings and insurance companies. Yet, this article finds an increase in systematic risk of banks, savings and insurance companies. This outcome may be due to increased financial integration, innovation, globalization and deregulation.