Risk Taking by Banks in the Transition Countries
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Risk Taking by Banks in the Transition Countries RAINER HASELMANN1 & PAUL WACHTEL2 1
University of Mainz, Jakob-Welder Weg 4, 55128 Mainz, Germany. E-mail: [email protected] 2 Stern School of Business, New York University, 44 West 4th Street, New York, NY 10012, USA. E-mail: [email protected]
Although the performance and privatisation of transition banks have been widely studied already, little is known about their risk-taking and risk management activities. We use a new European Bank for Reconstruction and Development (EBRD) survey data set of banks to examine risk taking by banks in the transition countries. We find no indication of excessive risk taking by specific ownership or size categories of banks. Also, we find no connections between risk taking and the quality of the institutional environment although an unsound environment is associated with higher levels of capital. Comparative Economic Studies (2007) 49, 411–429. doi:10.1057/palgrave.ces.8100214
Keywords: bank risk taking, banks in transition, risk management, law and banking, legal environment, collateral law JEL Classifications: P500, G210, G320
INTRODUCTION The banking sectors of the transition countries have progressed remarkably in the last 15 years. In fact, banking in most transition countries has largely shaken off the traumas of the transition era. At the start of the 21st century banks in these countries look very much like banks elsewhere. That is, they are by no means problem free but they are struggling with the same issues as banks in other emerging market countries. There have been a surprisingly large number of studies that have told us about the performance of these banks but we know very little about their risk taking behaviour and how the banking environment influences it.
R Haselmann & P Wachtel Risk Taking by Banks
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In this paper, we examine risk taking by banks in transition with information from the EBRD’s 2005 survey of bank managers1 and balance sheet and income data prepared by BankScope. The institutional environment differs considerably among the countries in our sample. The western European countries that joined the European Union (EU) in 2004 were obliged to establish creditor rights and ensure proper law enforcement while many of the other countries were not exposed to these external pressures for reform. Thus, institutions in these countries offer, on average, less protection for lenders as compared to the new member states (see EBRD, 2004 and Pistor, 2000). In this paper, we examine the relationship between the institutional environment and risk taking by banks. The role of financial intermediaries such as banks is to channel savings to investors. In a modern economy, banks do this by maintaining a delicate balance between risk taking and managing risk. Our aim here is to examine the link between banks’ risk-taking and risk management activities and the quality of the institutional environment. An examination of the relationship is interesting because theory is am
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