Banks’ risk taking and creditors’ bargaining power

Yuval Heller, Sharon Peleg Lazar, Alon Raviv

Research output: Contribution to journalArticlepeer-review

Abstract

We study the influence of unsecured debt (subordinated debt) on banks’ risk-taking in a contingent claim model where assets are risky debt claims. We consider the bargaining between stockholders and debtholders when choosing the level of asset risk. Replacing part of a bank's stock with subordinated debt leads to risk-shifting events occurring in a narrower domain of asset values (leverage ratios), but can lead to higher levels of risk, depending on the relative bargaining power. When side payments between the bank's claimholders are possible the inclusion of subordinated debt does not affect asset risk. Moreover, we show that severe, yet infrequent, regulatory corrective measures might have adverse effects on risk-shifting.

Original languageEnglish
Article number102198
JournalJournal of Corporate Finance
Volume74
DOIs
StatePublished - Jun 2022
Externally publishedYes

Keywords

  • Asset risk
  • Bargaining
  • Financial institutions
  • Leverage
  • Risk-taking
  • Stress test

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