Too Big to Fail or Too Small to Compete? The Impact of Basel III on Risk Taking of Large and Small Bank
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2018-07-31
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en
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"The Basel III framework was designed to improve the stability of the banking sector following the 2007-2008 financial crisis. However, the effectiveness of the new framework to limit banks’ risk taking is being contested as no significant changes have been made to the underlying risk-weighted assets (RWA) methodology. This thesis examines the impact of the RWA methodology on the risk-taking behavior of large and small banks in two different regulatory settings (the EU and the US). It argues that the fact that only large banks can adopt the more flexible IRB approach significantly influences the incentives and opportunities of both groups of banks to increase their risk taking. The results of using three alternative measures of risk taking indicate that adopting the IRB approach mediates the relationship between bank size and risk taking. While large banks tend to take lower portfolio risks than small banks, adopting the IRB approach increases their risk taking. Furthermore, this mediation effect disappears for the US sample where banks have less flexibility regarding the choice of the RWA approach. Overall, the thesis supports previous evidence concerning low risk sensitivity of the RWA methodology and sheds more light on the risk-taking behavior of small and large banks under Basel III."
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Faculteit der Managementwetenschappen