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Banks Risk Taking and Creditors Bargaining Power

Heller, Yuval and Peleg Lazar, Sharon and Raviv, Alon (2019): Banks Risk Taking and Creditors Bargaining Power.

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Abstract

We analyze the influence of unsecured debt (subdebt) on risk-shifting in banks whose assets are risky debt claims. We assume that the stockholders and subdebt-holders jointly decide on risk-shifting. We show that replacing part of the stock with subdebt: (1) leads to fewer risk-shifting events, but can lead to higher levels of risk, depending on the relative bargaining power, (2) does not change the level of risk-shifting when side payments are possible, and (3) may yield the surprising result that risk-shifting increases with tighter regulatory control.

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