Essays on Bank Risk-Taking

My doctoral thesis is entirely focused on the study of the effects of a US government business loan program established during the COVID-19 pandemic, the Paycheck Protection Program (PPP), on the risk-taking behavior of banks. In the first chapter, called Institutional Framework chapter, I provide a detailed presentation of the functioning of the PPP along with an in-depth description of the data that I use throughout my thesis, namely the Call Reports. The crucial feature of the program was that the PPP funds were distributed by banks. In the second chapter I replicate and extend the analysis of Ballew et al. (2022), who, using the OLS method, find that banks’ participation in the program is positively associated with greater banks’ risk-taking outside of the program. In this chapter I test the robustness of the analysis from Ballew et al. (2022) with respect to different empirical methodologies and different method of constructing variables. Using the Two-Stage Least Squares methodology, I find evidence that does not support the results obtained by Ballew et al. (2022). In the third chapter, I provide further empirical evidence on the effects of the PPP on bank risk-taking using several methodologies. In this case, I document a positive association between program participation and bank risk-taking in the short term, but not in the medium or long term. Though, I do not claim to have identified causal effects. In the fourth chapter, I study the impact of the PPP on the allocation of assets across risk-weight categories. I document that banks’ program participation is associated with a greater share of banks’ low-risk assets and a lower share of high-risk assets.