IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/16836.html
   My bibliography  Save this paper

On-site audits, sanctions, and bank risk-taking: An empirical overture towards a novel regulatory and supervisory philosophy

Author

Listed:
  • Delis, Manthos D
  • Staikouras, Panagiotis

Abstract

This paper investigates the role of banking supervision, measured in terms of enforcement outputs (i.e., on-site audits and sanctions) in containing bank risk-taking. Our results on the direct banking supervision–risk-taking correlation show an inverted U-shaped relationship between on-site audits and bank risk, while the nexus between enforcement actions and risk appears linear and negative. With respect to the combined effect of efficient supervision and banking regulation (in the form of capital and transparency requirements) we find that effective supervision and disclosure prerequisites are important and complementary mechanisms in reducing bank fragility, by contrast to capital requirements which are proven rather futile in controlling bank risk, even when supplemented with a higher volume of on-site audits and enforcement actions.

Suggested Citation

  • Delis, Manthos D & Staikouras, Panagiotis, 2009. "On-site audits, sanctions, and bank risk-taking: An empirical overture towards a novel regulatory and supervisory philosophy," MPRA Paper 16836, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:16836
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/16836/1/MPRA_paper_16836.pdf
    File Function: original version
    Download Restriction: no
    File URL: https://mpra.ub.uni-muenchen.de/27242/4/MPRA_paper_27242.pdf
    File Function: revised version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Tito Cordella & Eduardo Levy Yeyati, 1998. "Public Disclosure and Bank Failures," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 110-131, March.
    2. Binder, Michael & Hsiao, Cheng & Pesaran, M. Hashem, 2005. "Estimation And Inference In Short Panel Vector Autoregressions With Unit Roots And Cointegration," Econometric Theory, Cambridge University Press, vol. 21(4), pages 795-837, August.
    3. Rafael La Porta & Florencio Lopez‐De‐Silanes & Andrei Shleifer, 2006. "What Works in Securities Laws?," Journal of Finance, American Finance Association, vol. 61(1), pages 1-32, February.
    4. Utpal Bhattacharya & Hazem Daouk, 2002. "The World Price of Insider Trading," Journal of Finance, American Finance Association, vol. 57(1), pages 75-108, February.
    5. Berger, Allen N & Davies, Sally M & Flannery, Mark J, 2000. "Comparing Market and Supervisory Assessments of Bank Performance: Who Knows What When?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(3), pages 641-667, August.
    6. Kang, Jun-Koo & Liu, Wei-Lin, 2007. "Is universal banking justified? Evidence from bank underwriting of corporate bonds in Japan," Journal of Financial Economics, Elsevier, vol. 84(1), pages 142-186, April.
    7. Mr. Udaibir S Das & Mr. Marc G Quintyn, 2002. "Crisis Prevention and Crisis Management: The Role of Regulatory Governance," IMF Working Papers 2002/163, International Monetary Fund.
    8. Borio, Claudio & Zhu, Haibin, 2012. "Capital regulation, risk-taking and monetary policy: A missing link in the transmission mechanism?," Journal of Financial Stability, Elsevier, vol. 8(4), pages 236-251.
    9. Marc Quintyn & Michael W. Taylor, 2003. "Regulatory and Supervisory Independence and Financial Stability," CESifo Economic Studies, CESifo Group, vol. 49(2), pages 259-294.
    10. Gerard Caprio & James Barth & Ross Levine, 2008. "Bank Regulations Are Changing: But For Better or Worse?," Center for Development Economics 2008-04, Department of Economics, Williams College.
    11. Nergiz Dincer & Bilin Neyapti, 2008. "WHAT DETERMINES THE “LEGAL” QUALITY Of BANK REGULATION AND SUPERVISION?," Contemporary Economic Policy, Western Economic Association International, vol. 26(4), pages 607-622, October.
    12. Bhattacharya, Sudipto & Plank, Manfred & Strobl, Gunter & Zechner, Josef, 2002. "Bank capital regulation with random audits," Journal of Economic Dynamics and Control, Elsevier, vol. 26(7-8), pages 1301-1321, July.
    13. Ari Hyytinen & Tuomas Takalo, 2002. "Enhancing Bank Transparency: A Re-assessment," Review of Finance, European Finance Association, vol. 6(3), pages 429-445.
    14. John H. Boyd & Chun Chang & Bruce Smith, 1998. "Moral hazard under commercial and universal banking," Proceedings, Federal Reserve Bank of Cleveland, issue Aug, pages 426-471.
    15. Angkinand, Apanard P., 2009. "Banking regulation and the output cost of banking crises," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 19(2), pages 240-257, April.
    16. Demirguc-Kunt, Asli & Detragiache, Enrica, 2002. "Does deposit insurance increase banking system stability? An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 49(7), pages 1373-1406, October.
    17. Allen Berger & Sally Davies, 1998. "The Information Content of Bank Examinations," Journal of Financial Services Research, Springer;Western Finance Association, vol. 14(2), pages 117-144, October.
    18. Laeven, Luc & Levine, Ross, 2009. "Bank governance, regulation and risk taking," Journal of Financial Economics, Elsevier, vol. 93(2), pages 259-275, August.
    19. Stephen R. Bond, 2002. "Dynamic panel data models: a guide to micro data methods and practice," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 1(2), pages 141-162, August.
    20. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    21. Besanko, David & Kanatas, George, 1996. "The Regulation of Bank Capital: Do Capital Standards Promote Bank Safety?," Journal of Financial Intermediation, Elsevier, vol. 5(2), pages 160-183, April.
    22. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1998. "Law and Finance," Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1113-1155, December.
    23. Beck, Thorsten & Demirguc-Kunt, Asli & Levine, Ross, 2006. "Bank supervision and corruption in lending," Journal of Monetary Economics, Elsevier, vol. 53(8), pages 2131-2163, November.
    24. Edward Simpson Prescott, 2004. "Auditing and bank capital regulation," Economic Quarterly, Federal Reserve Bank of Richmond, vol. 90(Fall), pages 47-63.
    25. Barth, James R. & Caprio,Gerard & Levine, Ross, 2001. "The regulation and supervision of banks around the world - a new database," Policy Research Working Paper Series 2588, The World Bank.
    26. Flannery, Mark & Thakor, Anjan V., 2006. "Accounting, Transparency and Bank Stability," Journal of Financial Intermediation, Elsevier, vol. 15(3), pages 281-284, July.
    27. Cordella, Tito & Yeyati, Eduardo Levy, 2002. "Financial opening, deposit insurance, and risk in a model of banking competition," European Economic Review, Elsevier, vol. 46(3), pages 471-485, March.
    28. Frederick T. Furlong & Michael C. Keeley, 1991. "Capital regulation and bank risk-taking: a note (reprinted from Journal of Banking and Finance)," Economic Review, Federal Reserve Bank of San Francisco, issue Sum, pages 34-39.
    29. Nier, Erlend & Baumann, Ursel, 2006. "Market discipline, disclosure and moral hazard in banking," Journal of Financial Intermediation, Elsevier, vol. 15(3), pages 332-361, July.
    30. repec:bla:jecsur:v:18:y:2004:i::p:293-320 is not listed on IDEAS
    31. Blum, Jurg, 1999. "Do capital adequacy requirements reduce risks in banking?," Journal of Banking & Finance, Elsevier, vol. 23(5), pages 755-771, May.
    32. Stijn Claessens, 1998. "Banking reform in transition countries," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 2(2), pages 115-133.
    33. Mr. Dewitt D Marston, 2001. "Financial System Standards and Financial Stability: The Case of the Basel Core Principles," IMF Working Papers 2001/062, International Monetary Fund.
    34. Coffee, John C., Jr., 2007. "Law and the Market: The Impact of Enforcement," Working Papers 07-3, University of Pennsylvania, Wharton School, Weiss Center.
    35. DeYoung, Robert, et al, 2001. "The Information Content of Bank Exam Ratings and Subordinated Debt Prices," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(4), pages 900-925, November.
    36. Wu, Hsiu-Kwang, 1969. "Bank Examiner Criticisms, Bank Loan Defaults, and Bank Loan Quality," Journal of Finance, American Finance Association, vol. 24(4), pages 697-705, September.
    37. Stephen Bond, 2002. "Dynamic panel data models: a guide to microdata methods and practice," CeMMAP working papers CWP09/02, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
    38. Bilin Neyapti & Nergiz Dincer, 2005. "Measuring the Quality of Bank Regulation and Supervision with an Application to Transition Economies," Economic Inquiry, Western Economic Association International, vol. 43(1), pages 79-99, January.
    39. Keeley, Michael C, 1990. "Deposit Insurance, Risk, and Market Power in Banking," American Economic Review, American Economic Association, vol. 80(5), pages 1183-1200, December.
    40. White, Eugene Nelson, 1986. "Before the Glass-Steagall Act: An analysis of the investment banking activities of national banks," Explorations in Economic History, Elsevier, vol. 23(1), pages 33-55, January.
    41. Mr. Gianni De Nicolo & Abu M. Jalal & John H. Boyd, 2006. "Bank Risk-Taking and Competition Revisited: New Theory and New Evidence," IMF Working Papers 2006/297, International Monetary Fund.
    42. International Monetary Fund, 2008. "The Tasks Ahead," IMF Working Papers 2008/262, International Monetary Fund.
    43. Nerlove,Marc, 2005. "Essays in Panel Data Econometrics," Cambridge Books, Cambridge University Press, number 9780521022460, October.
    44. Barth, James R. & Caprio, Gerard Jr. & Levine, Ross, 2004. "Bank regulation and supervision: what works best?," Journal of Financial Intermediation, Elsevier, vol. 13(2), pages 205-248, April.
    45. Robert R. Bliss & Mark J. Flannery, 2000. "Market discipline in the governance of U.S. Bank Holding Companies: monitoring vs. influencing," Working Paper Series WP-00-3, Federal Reserve Bank of Chicago.
    46. repec:bla:jfinan:v:43:y:1988:i:5:p:1219-33 is not listed on IDEAS
    47. Thakor, Anjan V. & Boot, Arnoud (ed.), 2008. "Handbook of Financial Intermediation and Banking," Elsevier Monographs, Elsevier, edition 1, number 9780444515582.
    48. Noy, Ilan, 2004. "Financial liberalization, prudential supervision, and the onset of banking crises," Emerging Markets Review, Elsevier, vol. 5(3), pages 341-359, September.
    49. Calem, Paul & Rob, Rafael, 1999. "The Impact of Capital-Based Regulation on Bank Risk-Taking," Journal of Financial Intermediation, Elsevier, vol. 8(4), pages 317-352, October.
    50. Janice Boucher Breuer, 2004. "An Exegesis on Currency and Banking Crises," Journal of Economic Surveys, Wiley Blackwell, vol. 18(3), pages 293-320, July.
    51. Puri, Manju, 1996. "Commercial banks in investment banking Conflict of interest or certification role?," Journal of Financial Economics, Elsevier, vol. 40(3), pages 373-401, March.
    52. Chen, Yehning & Hasan, Iftekhar, 2006. "The transparency of the banking system and the efficiency of information-based bank runs," Journal of Financial Intermediation, Elsevier, vol. 15(3), pages 307-331, July.
    53. Decamps, Jean-Paul & Rochet, Jean-Charles & Roger, Benoit, 2004. "The three pillars of Basel II: optimizing the mix," Journal of Financial Intermediation, Elsevier, vol. 13(2), pages 132-155, April.
    54. Robert R. Bliss & Mark J. Flannery, 2002. "Market Discipline in the Governance of U.S. Bank Holding Companies: Monitoring vs. Influencing," Review of Finance, European Finance Association, vol. 6(3), pages 361-396.
    55. Fotios Pasiouras & Chrysovalantis Gaganis & Constantin Zopounidis, 2006. "The impact of bank regulations, supervision, market structure, and bank characteristics on individual bank ratings: A cross-country analysis," Review of Quantitative Finance and Accounting, Springer, vol. 27(4), pages 403-438, December.
    56. VanHoose, David, 2007. "Theories of bank behavior under capital regulation," Journal of Banking & Finance, Elsevier, vol. 31(12), pages 3680-3697, December.
    57. Edward Simpson Prescott, 2004. "Auditing and Bank Capital Regulation," Working Papers wp2004_0412, CEMFI.
    58. Furlong, Frederick T. & Keeley, Michael C., 1989. "Capital regulation and bank risk-taking: A note," Journal of Banking & Finance, Elsevier, vol. 13(6), pages 883-891, December.
    59. repec:fip:fedgsq:y:2006:i:june12 is not listed on IDEAS
    60. Barth, James R. & Caprio, Gerard, Jr. & Levine,Ross Eric, 2008. "Bank regulations are changing : for better or worse ?," Policy Research Working Paper Series 4646, The World Bank.
    61. John, Kose & John, Teresa A. & Saunders, Anthony, 1994. "Universal banking and firm risk-taking," Journal of Banking & Finance, Elsevier, vol. 18(2), pages 307-323, January.
    62. Cuoco, Domenico & Liu, Hong, 2006. "An analysis of VaR-based capital requirements," Journal of Financial Intermediation, Elsevier, vol. 15(3), pages 362-394, July.
    63. Mr. Michael W Taylor & Mr. Marc G Quintyn & Ms. Eva H. G. Hüpkes, 2005. "The Accountability of Financial Sector Supervisors: Principles and Practice," IMF Working Papers 2005/051, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Delis, Manthos D & Staikouras, Panagiotis & Tsoumas, Chris, 2013. "Enforcement actions and bank behavior," MPRA Paper 43557, University Library of Munich, Germany.
    2. Delis, Manthos D & Gaganis, Chrysovalantis & Pasiouras, Fotios, 2009. "Bank liquidity and the board of directors," MPRA Paper 18872, University Library of Munich, Germany.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Delis, Manthos D. & Tran, Kien C. & Tsionas, Efthymios G., 2012. "Quantifying and explaining parameter heterogeneity in the capital regulation-bank risk nexus," Journal of Financial Stability, Elsevier, vol. 8(2), pages 57-68.
    2. Delis, Manthos D. & Kouretas, Georgios P., 2011. "Interest rates and bank risk-taking," Journal of Banking & Finance, Elsevier, vol. 35(4), pages 840-855, April.
    3. Agoraki, Maria-Eleni K. & Delis, Manthos D. & Pasiouras, Fotios, 2011. "Regulations, competition and bank risk-taking in transition countries," Journal of Financial Stability, Elsevier, vol. 7(1), pages 38-48, January.
    4. Sascha Tobias Wengerek & Benjamin Hippert & André Uhde, 2019. "Risk allocation through securitization - Evidence from non-performing loans," Working Papers Dissertations 58, Paderborn University, Faculty of Business Administration and Economics.
    5. Hoque, Hafiz & Andriosopoulos, Dimitris & Andriosopoulos, Kostas & Douady, Raphael, 2015. "Bank regulation, risk and return: Evidence from the credit and sovereign debt crises," Journal of Banking & Finance, Elsevier, vol. 50(C), pages 455-474.
    6. Swamy, Vighneswara, 2014. "Bank regulation, supervision and efficiency during the global financial crisis," MPRA Paper 58295, University Library of Munich, Germany.
    7. Nguyen, Tu, 2013. "The disciplinary effect of subordinated debt on bank risk taking," Journal of Empirical Finance, Elsevier, vol. 23(C), pages 117-141.
    8. Teixeira, João C.A. & Matos, Tiago F.A. & da Costa, Gui L.P. & Fortuna, Mário J.A., 2020. "Investor protection, regulation and bank risk-taking behavior," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).
    9. Li, Hui & Liu, Hong & Veld, Chris, 2019. "The effects of bank regulation stringency on seasoned equity offering announcements," Journal of International Money and Finance, Elsevier, vol. 91(C), pages 71-85.
    10. Barth, James R. & Caprio, Gerard Jr. & Levine, Ross, 2004. "Bank regulation and supervision: what works best?," Journal of Financial Intermediation, Elsevier, vol. 13(2), pages 205-248, April.
    11. Stefano Caiazza & Matteo Cotugno & Franco Fiordelisi & Valeria Stefanelli, 2015. "Bank Stability and Enforcement Actions in Banking," CEIS Research Paper 334, Tor Vergata University, CEIS, revised 20 Mar 2015.
    12. Dutra, Tiago M. & Teixeira, João C.A. & Dias, José Carlos, 2023. "Banking regulation and banks’ risk-taking behavior: The role of investors’ protection," The Quarterly Review of Economics and Finance, Elsevier, vol. 90(C), pages 124-148.
    13. Pasiouras, Fotios & Gaganis, Chrysovalantis, 2013. "Regulations and soundness of insurance firms: International evidence," Journal of Business Research, Elsevier, vol. 66(5), pages 632-642.
    14. Delis, Manthos D & Gaganis, Chrysovalantis & Pasiouras, Fotios, 2009. "Bank liquidity and the board of directors," MPRA Paper 18872, University Library of Munich, Germany.
    15. Pasiouras, Fotios & Tanna, Sailesh & Zopounidis, Constantin, 2009. "The impact of banking regulations on banks' cost and profit efficiency: Cross-country evidence," International Review of Financial Analysis, Elsevier, vol. 18(5), pages 294-302, December.
    16. Noman, Abu Hanifa Md. & Gee, Chan Sok & Isa, Che Ruhana, 2018. "Does bank regulation matter on the relationship between competition and financial stability? Evidence from Southeast Asian countries," Pacific-Basin Finance Journal, Elsevier, vol. 48(C), pages 144-161.
    17. repec:zbw:bofrdp:2011_007 is not listed on IDEAS
    18. Shehzad, Choudhry Tanveer & De Haan, Jakob, 2015. "Supervisory powers and bank risk taking," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 39(C), pages 15-24.
    19. Salma Louati & Younes Boujelbene, 2021. "Basel Regulations and Banks’ Risk-efficiency Nexus: Evidence from Dynamic Simultaneous-equation Models," Journal of African Business, Taylor & Francis Journals, vol. 22(4), pages 578-602, October.
    20. Brandao-Marques, L. & Correa, R. & Sapriza, H., 2012. "International Evidence on Government Support and Risk-Taking in the Banking Sector," Other publications TiSEM 4a9756af-eb63-4867-ae29-3, Tilburg University, School of Economics and Management.
    21. Fang, Yiwei & Hasan, Iftekhar & Marton, Katherin, 2014. "Institutional development and bank stability: Evidence from transition countries," Journal of Banking & Finance, Elsevier, vol. 39(C), pages 160-176.

    More about this item

    Keywords

    Bank risk; Regulation; Supervision; Enforcement; Sanctions; Audits;
    All these keywords.

    JEL classification:

    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:16836. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.