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Risk Management, Capital Structure and Capital Budgeting in Financial Institutions

We test how active management of bank credit risk exposure affects capital structure, capital budgeting and profits. We find that banks that rebalance their CI they also lend more to businesses, both as a percentage of total assets and as a percentage of their overall lending, and they enjoy higher profits. The results hold controlling for bank size and holding company affiliation and are robust over time. We conclude that increasingly sophisticated risk management practices in banking are likely to improve the availability of bank credit.