Research Discussion Papers, Bank of Finland
Market reforms, legal changes and bank risk-taking – evidence from transition economies
(), Iftekhar Hasan
() and Katherin Marton
Abstract: The policy changes and structural reforms in transition
economies over the past two decades have created exogenous variations in
institutional development, which offers us an ideal natural experiment to
analyse the causal effects of institutions on bank risk-taking behaviour.
This paper examines a wide array of institutional reforms in respect of law
and legal institutions, banking liberalization, and enterprise
restructuring in privatization and corporate governance. Using a
difference-in-difference approach, we find that banks’ financial stability
has increased substantially subsequent to the institutional reforms.
Further analysis suggests that the enhancement of financial stability
mostly comes from the reduction of asset risk. Moreover, the effects of
institutional reforms on bank risk are more pronounced for domestic banks
than foreign banks. From the policy consideration, our study sheds light on
the risk implications of different institutional reforms that have been
characterizing transition countries.
Keywords: institutional development; bank risk; transition banking; foreign ownership; (follow links to similar papers)
JEL-Codes: G21; P30; P34; P52; (follow links to similar papers)
44 pages, March 23, 2011
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