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Tuesday, August 3 • 9:00am - 10:30am
3B2 When gambling for resurrection is too risky

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Divya Kirti, International Monetary Fund

The financial crisis pushed some large financial institutions to the brink of insolvency. Instead of gambling for resurrection, financial institutions in severe distress pulled back from risk taking, becoming systematically less willing to take on risky incremental investments than institutions with low default probabilities. Regulatory constraints alone cannot explain these findings: institutions in distress reduced risk even within investment opportunities with identical regulatory treatment. These findings suggest that risk shifting incentives do not necessarily dominate for large financial institutions. Actions that clarify ongoing survival, like stress tests, may be needed to support risk appetite during crises. JEL codes: G22, G21, G32, G28

avatar for Bohan Song

Bohan Song

Tulane University

avatar for Divya Kirti

Divya Kirti

International Monetary Fund

Tuesday August 3, 2021 9:00am - 10:30am EDT

Attendees (7)