Investment, financial, trade freedom and risk-taking: Empirical evidence from USA

Abstract

This study aims to explore investment, financial, and trade freedom impact on banks' risk-taking. The study uses the dataset of large commercial banks of the USA from 2002-2018. The findings prove that financial freedom reduces the bank's risk-taking, whereas investment and trade freedom increase large commercial banks' risk-taking. The behavior of risk-taking due to financial, trade, and investment freedom of under-capitalized and low-liquid banks seems to be marginally less impacted than well-capitalized and high-liquid banks. The findings are robust using loan loss reserves as a risk measure and subclassification of a sample. The results suggest that government's intervention is decisive in developing the degree of economic freedom for the financial system's stability.