Moral Hazard and Banking Risk, a Euro Area Analysis

Sammanfattning: The study investigates the effects of capital regulations on risk-taking within the Euro- zone banking sector from 2013 to 2019, specifically focusing on the impact of moral hazard stemming from bank charter value and ownership influence. Previous research suggests both bank charters and ownership influence can prompt different risk behaviours and po- tentially influence the effectiveness of capital regulations. Using a two-way fixed effects model on a dataset of 502 Eurozone banks, our analyses reveal a multifaceted relationship between bank risk, capital regulations, and moral hazard. More specifically, bank charter increases prudence while shareholder influence increases risk-taking. Moreover, our results suggest that the sign of Tier 1 capital’s effect on risk changes with shareholder influence, where widely held banks become riskier with a higher Tier 1 ratio. For bank charters, we find evidence that banks with high charters are negatively affected by Tier 1 capital, but only for credit risk. The results provide insight into the dynamics of capital regulations in the Eurozone banking sector, with implications for future policy and regulatory frame- works.