Bank risk and returns: did prompt corrective action make a difference?

Abstract

Purpose

The purpose of this paper is to assess the effects of prompt corrective action on bank risk and returns in an empirical framework.

Design/methodology/approach

The paper uses a difference-in-difference specification to analyse whether and how PCA affects bank risk and returns. As part of robustness, the analysis also uses a fixed effects specification with Driscoll–Kraay standard errors to account for serial correlation and cross-sectional dependence.

Findings

The findings reveal that banks under PCA framework contribute less to systemic risk and exhibit higher market valuation. These findings differ across recapitalised versus non-recapitalised banks and for banks with differing asset quality, capital and profitability. The overall price impact is a decline in lending rates and deposit costs.

Originality/value

To the best of the author’s understanding, this is one of the early studies in the Indian context to carefully examine the linkage between PCA and bank behaviour.

Citation

Ghosh, S. (2023), "Bank risk and returns: did prompt corrective action make a difference?", Journal of Financial Regulation and Compliance, Vol. 31 No. 5, pp. 568-587. https://doi.org/10.1108/JFRC-08-2022-0094