Bank Stability, Sovereign Debt and Derivatives by Joseph Falzon (eds.)

By Joseph Falzon (eds.)

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Denotes coefficient statistically different from zero (1% level, two-tail test), ** 5% level, * 10% level. credit activity is one of the riskiest areas of a bank, capable of weakening bank stability due to a strong deterioration in credit quality. 8). Evidence from the Financial Crisis in OECD Countries 25 Our results also signal that the one-period lagged risk measure (ln_Zi,t–1) and bank size variable (SIZE) are significant, having, as expected, a positive and negative relationship respectively with ln_Z.

Financing, bank borrowers would be better able to repay their loan obligations, thus reducing the risk of bank instability caused by the occurrence of credit risk. However, in more concentrated markets, incumbent banks exert their market power by setting high interest rates on lending, thus providing incentives to borrowers to finance only high-risk projects – and this ultimately undermines the ability of debtors to repay loans, and consequently the stability of the bank itself. Additionally, less competitive markets represent breeding grounds where overlarge, complex and highly interconnected big banks have better access to subsidies from national safety nets and pursue excessive risk taking consistent with moral hazard behaviors.

9. The latter (counterintuitive) findings suggest that in more mutualized banking systems, any decrease in systemic stability seems to stir banks into taking steps to improve their own future stability. 5137 Notes: CMS: cooperative banks’ market share. 15) in the two sub-periods considered. 15 in the pre-crisis and crisis period. 05 only in the crisis period. 05 in both sub-periods. ‘Pre-crisis period’ denotes the period from 2001 to 2006. ‘Crisis period’ denotes the period from 2007 to 2010. Standard errors of estimated coefficients are reported in parentheses.

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