charge-offs

Is there a link from bank size to risk taking?

In the wake of the subprime crisis, there has been widespread discussion of the disproportionate risks posed to the financial system by large banks that may consider themselves 'too big to fail'. This has led in turn to suggestions that radical policies with the effect of reducing bank size and complexity may be needed. We present results of GMM estimation for 713 OECD banks which show that size is indeed related to risk taking, as measured by charge-offs, and that banks with large proportions of Tier 2 capital are particularly vulnerable to adverse incentives.