Regulation, size and changing incentives of banks: Stock market-based approach

Abstract

This paper empirically examines the relationship between banking industry's regulation, bank asset size and risk-taking incentives in Korean banking industry. By partitioning the whole sample period (1994-2008) into 3 subperiods based on the degree of banking industry's regulations and employing stock market-derived measures as banks' ex-ante risk-taking incentives, we investigate whether larger banks have greater risk-taking incentives than smaller ones. Overall, we found that larger banks had greater risk-taking incentives than smaller ones. More importantly, we found that larger banks concentrate on systematic, market-related risk-taking when banking regulations are loose, however, they appear to change their risk-taking strategies into increasing more non-market related, firm specific risk-taking when regulations become tightened. © Seok Weon Lee, 2013.