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Vol. 76, No. 4
Posted 1994-07-01

Explanations for the Increased Riskiness of Banks in the 1980s

by Sangkyun Park

In the 1980s, the number of bank failures increased sharply, and banks in general experienced increasing problem loans and dwindling capital. The main explanations for the deterioration of bank asset quality include increased incentives for risk-taking by bank stockholders, desperate risk-taking by bank managers to increase profits, and unexpected economic shocks. Sangkyun Park reviews the logic of the three explanations and examines their empirical significance. He finds that deliberate risk-taking by both stockholders and managers was consistent with the behavior of a sizable proportion, though not the majority, of banks. He also concludes that economic shocks were significant, but do not negate the effects of deliberate risk-taking.




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