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Competition, Risk-shifting, and Public Bail-out Policies

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  • Reint Gropp
  • Hendrik Hakenes
  • Isabel Schnabel

Abstract

This article empirically investigates the competitive effects of government bail-out policies. We construct a measure of bail-out perceptions by using rating information. From there, we construct the market shares of insured competitor banks for any given bank, and analyze the impact of this variable on banks' risk-taking behavior, using a large sample of banks from OECD countries. Our results suggest that government guarantees strongly increase the risk-taking of competitor banks. In contrast, there is no evidence that public guarantees increase the protected banks' risk-taking, except for banks that have outright public ownership. These results have important implications for the effects of the recent wave of bank bail-outs on banks' risk-taking behavior. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

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Bibliographic Info

Article provided by Society for Financial Studies in its journal Review of Financial Studies.

Volume (Year): 24 (2011)
Issue (Month): 6 ()
Pages: 2084-2120

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Handle: RePEc:oup:rfinst:v:24:y:2011:i:6:p:2084-2120

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  1. Andrea Sironi, 2001. "Testing for market discipline in the European banking industry: evidence from subordinated debt issues," Proceedings, Federal Reserve Bank of Chicago, issue May, pages 366-384.
  2. Reint Gropp & Jukka Vesala, 2002. "Deposit insurance, moral hazard, and market monitoring," Proceedings, Federal Reserve Bank of Chicago, issue May, pages 75-107.
  3. Cordella, Tito & Yeyati, Eduardo Levy, 2003. "Bank bailouts: moral hazard vs. value effect," Journal of Financial Intermediation, Elsevier, vol. 12(4), pages 300-330, October.
  4. Sapienza, Paola, 2004. "The effects of government ownership on bank lending," Journal of Financial Economics, Elsevier, vol. 72(2), pages 357-384, May.
  5. Keeley, Michael C, 1990. "Deposit Insurance, Risk, and Market Power in Banking," American Economic Review, American Economic Association, vol. 80(5), pages 1183-1200, December.
  6. Gropp, Reint & Vesala, Jukka & Vulpes, Giuseppe, 2006. "Equity and Bond Market Signals as Leading Indicators of Bank Fragility," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(2), pages 399-428, March.
  7. James R. Barth & Gerard Caprio, Jr. & Ross Levine, 2002. "Bank Regulation and Supervision: What Works Best?," NBER Working Papers 9323, National Bureau of Economic Research, Inc.
  8. Hyytinen, A. & Takalo, T., 2000. "Enhancing Bank Transparency: a Re-assessment," University of Helsinki, Department of Economics 492, Department of Economics.
  9. Asli Demirguc-Kunt & Enrica Detragiache, 2000. "Does Deposit Insurance Increase Banking System Stability? An Empirical Investigation," Econometric Society World Congress 2000 Contributed Papers 1751, Econometric Society.
  10. Hakenes, Hendrik & Schnabel, Isabel, 2004. "Banks without Parachutes -- Competitive Effects of Government Bail-out Policies," Sonderforschungsbereich 504 Publications 04-53, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim.
  11. Isabel Schnabel, 2005. "The Role of Liquidity and Implicit Guarantees in the German Twin Crisis of 1931," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2005_5, Max Planck Institute for Research on Collective Goods.
  12. Schnabel, Isabel, 2004. "The German Twin Crisis of 1931," The Journal of Economic History, Cambridge University Press, vol. 64(03), pages 822-871, September.
  13. Franklin Allen & Douglas Gale, 2004. "Competition and financial stability," Proceedings, Federal Reserve Bank of Cleveland, pages 453-486.
  14. Boyd, John H. & Runkle, David E., 1993. "Size and performance of banking firms : Testing the predictions of theory," Journal of Monetary Economics, Elsevier, vol. 31(1), pages 47-67, February.
  15. Shrieves, Ronald E. & Dahl, Drew, 1992. "The relationship between risk and capital in commercial banks," Journal of Banking & Finance, Elsevier, vol. 16(2), pages 439-457, April.
  16. Frederick T. Furlong, 1988. "Changes in bank risk," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue Mar 25.
  17. Demsetz, Rebecca S & Strahan, Philip E, 1997. "Diversification, Size, and Risk at Bank Holding Companies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(3), pages 300-313, August.
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  1. Thoughts on the future of banking in Ireland…
    by brianmlucey in Brian M. Lucey on 2012-01-21 07:32:45
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Cited by:
  1. Lammertjan Dam & Michael Koetter, 2011. "Bank bailouts, interventions, and moral hazard," Proceedings, Federal Reserve Bank of Chicago, issue May, pages 299-326.
  2. Blaise Gadanecz & Kostas Tsatsaronis & Yener Altunbas, 2008. "External support and bank behaviour in the international syndicated loan market," BIS Working Papers 265, Bank for International Settlements.
  3. Hakenes, Hendrik & Schnabel, Isabel, 2004. "Banks without Parachutes -- Competitive Effects of Government Bail-out Policies," Sonderforschungsbereich 504 Publications 04-53, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim.
  4. Raquel de F. Oliveira & Rafael F. Schiozer & Lucas A. B. de C. Barros, 2011. "Too Big to Fail Perception by Depositors: an empirical investigation," Working Papers Series 233, Central Bank of Brazil, Research Department.
  5. International Monetary Fund, 2012. "Quantifying Structural Subsidy Values for Systemically Important Financial Institutions," IMF Working Papers 12/128, International Monetary Fund.
  6. H. Evren Damar & Reint Gropp & Adi Mordel, 2012. "The Ex-Ante Versus Ex-Post Effect of Public Guarantees," Working Papers 12-22, Bank of Canada.
  7. Powell, Andrew & Maier, Antonia & Miller, Marcus, 2012. "Prudent Banks and Creative Mimics: Can we tell the difference?," CAGE Online Working Paper Series 75, Competitive Advantage in the Global Economy (CAGE).
  8. Schnabel, Isabel & Körner, Tobias, 2012. "Abolishing Public Guarantees in the Absence of Market Discipline," Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 65401, Verein für Socialpolitik / German Economic Association.

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