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Banks without parachutes: Competitive effects of government bail-out policies

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  • Hakenes, Hendrik
  • Schnabel, Isabel

Abstract

We analyze the competitive effects of government bail-out policies in two models with different degrees of transparency in the banking sector. Our main result is that bail-outs lead to higher risk-taking among the protected bank's competitors, independently of transparency. The reason is that the prospect of a bail-out induces the protected bank to expand, which intensifies competition in the deposit market, depresses other banks' margins, and thereby increases risk-taking incentives. Contrary to conventional wisdom, protected banks may take lower risks when transparency in the banking sector is low and the deposit supply is sufficiently elastic.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Stability.

Volume (Year): 6 (2010)
Issue (Month): 3 (September)
Pages: 156-168

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Handle: RePEc:eee:finsta:v:6:y:2010:i:3:p:156-168

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Web page: http://www.elsevier.com/locate/jfstabil

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Keywords: Government bail-out Banking competition Transparency "Too big to fail" Financial stability;

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  1. Thoughts on the future of banking in Ireland…
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