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The relationship between excessive lending, risk premium and risk-taking: evidence from European banks

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posted on 2020-12-22, 09:49 authored by Thaer Alhalabi, Vitor CastroVitor Castro, Justine WoodJustine Wood
Banks normally trade-off the amount of loans created by the amount of risk piled up in their assets portfolios. However, their performance can induce a ‘search for yield’ or ‘gamble to survive’ behaviour. Using a sample of 149 European banks during the period 2001-2016, we show that the risk management hypothesis holds for the period after the 2007-08 financial crisis and for large banks. Contrarily, the moral hazard hypothesis, under which banks practise excessive lending to relatively risky borrowers that pay higher premium but increase their credit risk, is supported in the pre-crisis period and for small banks. Additionally, we provide important implications to suggest that the post-crisis regulations have restrained banks with poor performance from the ‘gamble to survive’ behaviour.

History

School

  • Business and Economics

Department

  • Business
  • Economics

Published in

International Journal of Finance and Economics

Volume

28

Issue

1

Pages

448-471

Publisher

Wiley

Version

  • AM (Accepted Manuscript)

Rights holder

© Wiley

Publisher statement

This is the peer reviewed version of the following article: Alhalabi, T, Castro, V, Wood, J. The relationship between excessive lending, risk premium and risk-taking: Evidence from European banks. Int J Fin Econ. 2023; 28: 448– 471. https://doi.org/10.1002/ijfe.2430, which has been published in final form at https://doi.org/10.1002/ijfe.2430. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Use of Self-Archived Versions.

Acceptance date

2020-12-20

Publication date

2021-01-10

Copyright date

2021

ISSN

1076-9307

eISSN

1099-1158

Language

  • en

Depositor

Dr Justine Wood. Deposit date: 22 December 2020

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