Essays on bank risk-taking, diversification and ethics during the financial crisis

Abstract

This thesis analyzes bank risk-taking, revenue diversification and the ethical behavior of financial institutions in the context of the last financial crisis by three essays. The first essay examines bank-specific and macroeconomic determinants of bank risk for a large sample of commercial banks operating in the euro area. The main findings are that capitalization, profitability, efficiency and liquidity are inversely and significantly related to bank risk, whereas wholesale funding increases bank risk. We also find that less concentrated markets, lower interest rates, higher inflation rates, and economic crises (with e.g., falling GDPs) increase bank risk. The second essay focuses on the effect of revenue diversification on non-performing loans of Eurozone banks. The main conclusion is that European banks can significantly reduce their non-performing loan ratios by increasing revenue diversification. This relationship is enhanced during the crisis period, suggesting that revenue-diversified banks are better prepared for adverse macroeconomic conditions. Finally, the third essay studies the corporate governance factors that explain ethical reputation (proxied by the Covalence EthicalQuote index) using an international sample of large financial institutions. This essay concludes that financial institutions with board characteristics that reflect more stringent monitoring have better ethical reputations. Specifically, the results show a statistically positive relationship between ethical reputation and board size, experience, and gender diversity but a negative relationship between ethical reputation and the busyness of the board members.