Moral hazard after the financial crisis: Have European banks learned their lesson?
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2020-07-29
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en
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Abstract:
The moral hazard issue is associated with excessive risk-taking. On the one hand, the excess risk is shifted to the creditors. On the other hand, the excess risk leads to the vulnerable banking system and reduces banks' ability to resist the crisis. Moral hazard helped fuel the financial crisis. After the 2008 financial crisis, the introduction of Basel III is expected to strengthen banking stability. So, this paper intends to explore whether the moral hazard still exists around European banks after the financial crisis in 2008 with the conditions of the implementation of Basel III. The moral hazard problem is detected by analyzing the risk-shifting types. The risk-shifting types are conducted by observing the relationship between the Z-score changes and the changes in capital structure components. Also, the panel data is contributed by 142 banks in Europe from 2013 to 2018. This paper found that the moral hazard existed for all the collected samples. For the large banks' samples, the existing moral hazard issue cannot be explained by the present risk-shifting type. Moreover, the moral hazard problem of small banks' samples is caused by the other debt-based risk-shifting.
Key words: Moral hazard, risk shifting, European banks, capital structure
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Faculteit der Managementwetenschappen