Revenge of the Steamroller: ABCP as a Window on Risk Choices

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Abstract

We use credit-arbitrage asset-backed commercial paper vehicles as a laboratory to empirically examine financial institutions' motivations to take bad-tail systematic risk. By comparing the characteristics of global banks that sponsored credit-arbitrage vehicles prior to the global financial crisis to those that did not, we show that owner-manager agency problems, government safety nets, and government ownership of banks are associated with bad-tail systematic risk-taking. Although good governance is associated with less risk-taking on average, well-governed banks that also have a high ex ante expectation of being bailed out by the government take more risk. Lastly, we find mixed evidence that tougher bank capital regulation deters bad-tail risk-taking.

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APA

Arteta, C., Carey, M., Correa, R., & Kotter, J. (2020). Revenge of the Steamroller: ABCP as a Window on Risk Choices. Review of Finance, 24(3), 497–528. https://doi.org/10.1093/rof/rfz017

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