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Regulatory regimes and bank behavior

Title
Regulatory regimes and bank behavior
Authors
Lee S.W.
Ewha Authors
이석원
SCOPUS Author ID
이석원scopus
Issue Date
2011
Journal Title
Risk Governance and Control: Financial Markets and Institutions
ISSN
2077-429XJCR Link
Citation
vol. 1, no. 4, pp. 31 - 38
Keywords
Banking industryNational banksRegional banksRegulationsRisk-taking
Publisher
Virtus Interpress
Indexed
SCOPUS scopus
Abstract
The purpose of this paper is to examine how the risk-taking behavior differed between Korean regional banks and national banks for the two different regulatory regimes; a very loose regulation period (1994-1997) and a very tightened regulation period (1998-2005). From the panel analysis over the period 1994-2005, we found that regional banks took riskier strategies than national banks when banking regulations are loose. Moreover, their higher risk-taking contributed to higher profit under the period of loose regulation. However, after the banking regulations were tightened after financial crisis around the late 1990s, this phenomenon disappeared and the tendency of regional banks to take greater risk than national banks was not observed any more. Also, the positive relationship between risk-taking and profitability was not observed either after regulations were tightened. These empirical findings would have the following policy implications. When the economic conditions are good, and therefore, banking regulations are relatively loose, the greater risk-taking of regional banks could be profitable, because regional banks are in a better situation in terms of maintaining their market share based on the close ties with their regional clients, and can be protected from excessive competition with national banks. But, if the economic conditions get worse and financial crisis occurs, and therefore, banking regulations get tightened, regional banks are more adversely and sensitively affected by these shocks than national banks because their size is small and their assets are less diversified than national banks, especially being concentrated on loans to small and medium size business sector and real estate loans, which are very sensitive to the fluctuation of the economy. Furthermore, if these adverse economic and financial shocks continue long, the probability of regional banks to fail would be substantially higher and it can cause a serious damage to the regional economy. To avoid these adverse consequences in economic and financial crisis, regional banks need to diversify their asset portfolios and earnings structure, and improve the skill of more forward-looking risk management. © 2011, Virtus Interpress. All rights reserved.
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스크랜튼대학 > 국제학부 > Journal papers
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