Looting and risk shifting in banking crises

John H. Boyd, Hendrik Hakenes

Research output: Contribution to journalArticlepeer-review

14 Scopus citations


We construct a model of the banking firm with inside and outside equity and use it to study bank behavior and regulatory policy during crises. In our model, a bank can increase the risk of its asset portfolio ("risk shift"), convert bank assets to the personal benefit of the bank manager ("loot"), or do both. A regulator has three policy tools: it can restrict the bank's investment choices; it can make looting more costly; and it can force banks to hold more equity. Capital regulation may increase looting, and in extreme cases even risk shifting. Looting penalties reduce both looting and risk-shifting.

Original languageEnglish (US)
Pages (from-to)43-64
Number of pages22
JournalJournal of Economic Theory
Issue number1
StatePublished - Jan 2014

Bibliographical note

Copyright 2013 Elsevier B.V., All rights reserved.


  • Asset substitution
  • Gambling
  • Looting
  • Risk shifting
  • Stealing
  • Tunneling

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