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Bank‐Owned Life Insurance and Bank Risk
Author(s) -
Davidson Travis R.
Publication year - 2017
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/fire.12135
Subject(s) - business , market liquidity , life insurance , currency , unintended consequences , credit risk , actuarial science , monetary economics , economics , finance , political science , law
The use of bank‐owned life insurance (BOLI) has more than tripled since 2001 and has caught the attention of the Office of the Comptroller of the Currency. I find increases in BOLI lead to higher levels of liquidity risk, credit risk, and interest rate risk. Robustness tests confirm these results and suggest over‐ and underinvestment in BOLI and use of BOLI as a tax shelter contribute to risk increases. Results indicate that the concerns expressed by regulators are warranted, and suggest insurance may not always have the intended effect of reducing firm risk because of unintended consequences or misuse.