Risk-taking behavior and bank charter value of listed banks: An empirical study in China

1. Risk-taking behavior and bank charter value of listed banks:An empirical study in China Yanping Li , Liyan Han School of Economics & management, Beihang University,Beijing,100083,China E-mail address:happyping123@163.com

2. Introduction • Identifying and measuring banks’ risk-taking behaviors are crucial to build finance safety nets. • Risk-taking behaviors exhibit mainly in banks’ moral hazard in their asset portfolio. • Bank charter value is the most important element lured banks into excessive adventure.

3. Related literature • Bank charter value rests with the market power（Keeley，1990）, reputation（Boot and Greenhaum，1993）as well as the relationship between banks and their clients（Besanko and Thakor，1993) • Merton(1977) discovers the relationship between deposit insurance and a put option（Marcus，1984；Furlong and Keeley，1989；Keeley,1990） • Many studies have tested the regulation effects (Kahane,1977;Bhattacharya and Thakor，1993; Buser et al,1981; Sangkyun Park,1997) • Some studies are involved in the mechanism of bank charter value acting on bank risk-taking behaviors(Dewatripont and Tirole,1993; Dale and Lee,2001;Barth et al.2001，2004; Francisco. Gonzalez,2005 )

4. Data, variables and methodology • Data source: CSMAR series data base supplied by Shenzhen GTA information and technology limited company. • Samples: all the five listed banks in china stock exchange . • Time: from 1999 to 2005

5. Variables

6. Model • The initial model is set as following: • The final model form is set as following:

7. Empirical results

8. Conclusions • L/TA and LNA have negative relationship with bank charter value. • The subtractive coefficient of L/TA suggests that the riskier the banks are, the lower their charter values are, and vice versa. • The relationship between bank size and charter value is a quadratic equation and its form should be U-shaped. • The action of L/E and L/TA on banking operations varies across the time and they have the identical impact on all the five banks at a certain time. • Different listed time results in the different regression result between Huaxia bank and other banks.

9. Summary and policy implication • We find that the relationship between bank asset and charter value is a quadratic equation and its form should be U-shaped. • We expect the government to retreat from the economy from many fields since bank charter value can not represent the bank’s market reputation and its future prospect completely. • Expanding the banks by increasing their asset is a viable means of strengthening their ability to fight back risk.

10. References • Buser，Sa, Ah，Chen and E.J.Kane.，1981. Federal deposit，regulatory policy and optimal bank capital. Journal of Finance 36，51－60 • Dale K. Osborne and Seokwon Lee., 2001, Effects of deposit insurance reform on moral hazard in US banking. Journal of Business and Accounting 28(7), 979-992 • Francisco.Gonzalez., 2005, Bank regulation and risk-taking incentives: An international comparison of bank risk. Journal of Banking and Finance 29, 1153-1184 • Furlong，F.T. and M.C. Keeley.，1989，Capital regulation and bank risk－taking：A note. Journal of Banking and Finance 13，883－891 • Kahane，M.C., 1977，Capital adequacy and the regulation of financial intermediaries. Journal of Banking and Finance 1，207－218 • Linda Allen and Anoop Rai., 2005, Bank charter value and capital level：An international comparison. Journal of Economics and Business 48:269-284 • Marcus，A.，1984, Deregulation and bank financial policy. Journal of Banking and Finance 8, 557－565 • Merton，R.C.，1977，An analytic derivation of the cost of deposit insurance and loan guarantees. Journal of Banking and Finance 1，3－11 • Rithchken P.J.B，Thomson，R.P. DeGennaro and A Li., 1993, On flexibility，capital structure and investment decisions for insured banks. Journal of Banking and Finance 17，1133－1146 • Sankarshan Acharya，1996, Charter value, minimum bank capital requirement and deposit insurance pricing in equilibrium. The Journal of Banking and Finance 20, 351-375 • Sangkyun Park.,1997, Risk－taking behavior of banks under regulation, Journal of Banking and Finance 21, 491－507 • Yuk－Shee Chan, Stuart I. Green Bamn, and Anjan V. Thakor., 1992, Is fairly priced deposit insurance deposit insurance possible？The Journal of Finance 1, 227-245