Dr Abraham Adu

We examine the influence of peer firms on bank risk-taking, using a rich sample of data covering 29 countries and 4832 individual banks between 1990 and 2023. We follow the instrumental variable approach suggested by Leary and Roberts (2014), posit and find evidence that individual banks mimic their peers when they make corporate banking risk-taking decisions. Results from 2SLS estimation is marginally pronounced than that of OLS estimation. The 2SLS results indicate that a bank increases risk-taking by 66.8 percent for a one standard deviation change in peer-average risk-taking. We find that international banks mimic their peers when they make risk-taking decisions. However, US banks are less likely to mimic their peer’s risk-taking behaviours relative to those in the rest of the world. We find similar peer effects on bank risk-taking in Europe, Asia Pacific, and Emerging economies. The findings are more pronounced for banks that operate in highly competitive banking markets. This evidence suggests that peer effects of bank risk-taking matter globally, and the benefits of mimicking are higher in economies beleaguered with weaker financial institutions (i.e., low governance quality and financial development).