Size, leverage, and risk-taking of financial institutions

We investigate the link between firm size and risk-taking among financial institutions during the period of 2002 to 2012 and find size is positively correlated with risk-taking measures. Second, a decomposition of the primary risk measure, the Z-score, reveals that financial firms engage in excessive risk-taking mainly through increased leverage. Third, banks that enjoy better corporate governance engage in less risk-taking. Fourth, investment banks engage in more risk-taking compared to commercial banks. Finally, the positive relation between bank size and risk is present in the pre-crisis period (2002-2006) and the crisis period (2007-2009), but not in the post-crisis period (2010-2012).