Agency problems and risk taking at banks
By: Rebecca S. Demsetz, Marc R. Saidenberg, and Philip E. Strahan.
Contributors: Saidenberg, Marc R.; Strahan, Philip E. 1963-; Federal Reserve Bank of New York.
Series: Staff reports ;; no. 29; Staff reports (Federal Reserve Bank of New York : Online) ;; no. 29.
Publisher: Federal Reserve Bank of New York
Published: 1997
Place of publication: [New York, N.Y.]
Language: eng
Format: Electronic resource
Number of pages: 37
Subjects: Deposit insurance -- Mathematical models.; Risk management -- Mathematical models.; Bank failures -- Mathematical models.
Description: "The moral hazard problem associated with deposit insurance generates the potential for excessive risk taking on the part of bank owners.  The banking literature identifies franchise value--a firm's profit-generating potential--as one force mitigating that risk taking.  We argue that in the presence of owner/manager agency problems, managerial risk aversion may also offset the excessive risk taking that stems from moral hazard.  Empirical models of bank risk tend to focus either on the disciplinary role of franchise value or on owner/manager agency problems.  We estimate a unified model and find that both franchise value and ownership structure affect risk at banks.  More important, we identify an interesting interaction effect: The relationship between ownership structure and risk is significant only at low franchise value banks--those where moral hazard problems are most severe and where conflicts between owner and manager risk preferences are therefore strongest.  Risk is lower at banks with no insider holdings, but among other banks, there is no relationship between the level of insider holdings and risk.  This suggests that the owner/manager agency problem affects the choice of risk for only a small number of banks--those with low franchise value and no insider holdings.  Most of these banks increase their insider holdings within a year, and these changes in ownership structure are associated with increased risk.  This suggests that owner/manager agency problems are quickly addressed"--Federal Reserve Bank of New York web site.
Notes: Includes bibliographical references.
Title from PDF file as viewed on 1/31/2005.
Also available in print.
System requirements: Adobe Acrobat Reader.
Mode of access: World Wide Web.