Title: Bank behaviour in good times and bad times: the impact of regulations and risk taking on bank performance

Authors: Miroslav Mateev; Petko Bachvarov

Addresses: American University in the Emirates, International Academic City, Dubai, UAE ' University of Finance, Business and Entrepreneurship, 1 Gusla Street, Sofia, Bulgaria

Abstract: In this paper, we investigate the main determinants of bank performance before, during and after the recent financial crisis of 2007-2008. Using a sample of 178 large and medium sized banks from 33 countries around the globe, we test the validity of different hypotheses advanced in the academic literature. We find that financial institutions that performed more poorly during the crisis had, on average, lower return in 2006, less deposits and less leverage, higher risk, and more funding fragility, and they come from countries with better institutional environment. We also investigate the role of bank regulations and their impact on bank performance during good times and bad times. We provide new evidence that restrictions on bank activities are, in general, uncorrelated with the performance of banks during the crisis; however, this relationship is significant for large banks. Our analysis provides convincing evidence for the increased power of regulations and the diminishing role of bank risk taking after the crisis.

Keywords: credit crisis; risk taking; regulation; bank governance; ownership control; institutional environment; funding fragility; capital adequacy; short-term funding; equity return.

DOI: 10.1504/AJFA.2018.093038

American Journal of Finance and Accounting, 2018 Vol.5 No.3, pp.193 - 252

Received: 04 Dec 2017
Accepted: 06 Feb 2018
Published online: 04 Jul 2018 *

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