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International Evidence on Government Support and Risk Taking in the Banking Sector

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  • Luís Brandão Marques
  • Ricardo Correa
  • Horacio Sapriza

Abstract

Government support to banks through the provision of explicit or implicit guarantees affects the willingness of banks to take on risk by reducing market discipline or by increasing charter value. We use an international sample of bank data and government support to banks for the periods 2003-2004 and 2009-2010. We find that more government support is associated with more risk taking by banks, especially during the financial crisis (2009-10). We also find that restricting banks' range of activities ameliorates the moral hazard problem. We conclude that strengthening market discipline in the banking sector is needed to address this moral hazard problem.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 13/94.

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Length: 36
Date of creation: 02 May 2013
Date of revision:
Handle: RePEc:imf:imfwpa:13/94

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Keywords: Banking sector; Bank supervision; Bank regulations; Risk management; bank risk taking; deposit insurance; foreign currency deposit; return on assets; bank size; bank value; bank bailouts; banking industry; bank ownership; bank managers; bank valuation; bank subsidiaries; financial strength; bank distress; banking regulations; bank holding companies; bank supervisory power; bank charter; accounting treatment; banking crises; banking markets; liquidity ratio; bank behavior; bank balance sheets; banking system; bank risk-taking; bank equity; bank debt; bank failure; bankers; subordinated debt; bank data; bank activities; regulatory approach; deposit insurance scheme; bank capital; bank deposit; restrictions on bank; risk of bank failure; bank failures; bank supervisors;

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Cited by:
  1. Carlos O. Arteta & Mark S. Carey & Ricardo Correa & Jason Kotter, 2008. "Which banks sponsored ABCP vehicles and why?," Proceedings, Federal Reserve Bank of Chicago 1072, Federal Reserve Bank of Chicago.
  2. Ricardo Correa & Kuan-Hui Lee & Horacio Sapriza & Gustavo Suarez, 2012. "Sovereign credit risk, banks' government support, and bank stock returns around the world," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 1069, Board of Governors of the Federal Reserve System (U.S.).
  3. Lamont Black & Ricardo Correa & Xin Huang & Hao Zhou, 2013. "The systemic risk of European banks during the financial and sovereign debt crises," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 1083, Board of Governors of the Federal Reserve System (U.S.).
  4. Correa, Ricardo & Sapriza, Horacio, 2014. "Sovereign Debt Crises," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 1104, Board of Governors of the Federal Reserve System (U.S.).
  5. Oana Toader, 2014. "Quantifying and Explaining Implicit Public Guarantees for European Banks," Working Papers, HAL halshs-01015376, HAL.

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