| This dissertation investigates how Risk-Based Insurance Premium (RBIP) affects the moral hazard risk-taking incentives of banks. We find that RBIP appears to be effective in significantly reducing the systematic risk-taking incentives of the banks. Considering that banks' asset portfolio is, necessarily, a largely systematic risk-related one, the significant decrease in their systematic risk-taking incentives provides some evidence for the effectiveness of RBIP. However, with respect to the nonsystematic risk-taking behavior, the results generally indicate statistically insignificant decrease in the risk-taking incentives after RBIP. To well-diversified investors who can diversify nonsystematic risk away, nonsystematic risk may not be a risk any more. However, to maintain a sound banking environment and to reduce the riskiness of the individual banks, this result implies that regulatory agents should monitor the banks' nonsystematic risk-taking behavior more frequently, as long as it is positively related to the banks' failures. Banks with lower moral hazard incentives as those with smaller asset size and higher capital ratio. The main result for this test is that, with RBIP, the decrease in the risk-taking incentives of the banks with higher moral hazard incentives (larger asset-size and lower capital-ratio banks) is less than that of the banks with lower moral hazard incentives (smaller asset-size and higher capital-ratio banks), with respect to both systematic and nonsystematic risk-taking measures. Furthermore, the change in the nonsystematic risk-taking incentives of the banks with higher moral hazard incentives is rather mixed, while their systematic incentives are decreased. These findings imply that the regulatory agents should allocate more time and effort toward monitoring the banks with higher moral hazard incentives, in particular, their nonsystematic risk-taking behavior. We also test whether the banks, whose risk-taking incentives decrease more with RBIP, could adjust interest rate profit margins in a more profitable way than other banks. The result of this test indicates that the banks, whose risk-taking incentives decrease more with RBIP (banks with the lower capital ratio and higher risk level), tend to adjust net interest margins more profitably than other banks. Thus, those banks could shift part of the costs of RBIP to the bank customers. That is, bank customers, collectively, bear at least part of the RBIP tax. However, this compensation of the decreased expected profits by adjusting net interest margins more profitably is not great enough. Thus, the stock returns of those banks are more adversely evaluated than those of the banks with higher capital ratio and lower risk level. |
