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

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Author Info

  • Reint Gropp

    ()
    (Department of Finance, Accounting and Real Estate, European Buisness School, Germany)

  • Hendrik Hakenes

    (Institut für Finanzmarkttheorie, Leibniz Universität Hannover, Germany)

  • Isabel Schnabel

    (Chair of Financial Economics, Johannes Gutenberg-Universität Mainz, Germany)

Abstract

This paper empirically investigates the effect of government bail-out policies on banks outside the safety net. 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.

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File URL: http://www.macro.economics.uni-mainz.de/RePEc/pdf/Discussion_Paper_1003.pdf
File Function: First version, 2010
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Bibliographic Info

Paper provided by Gutenberg School of Management and Economics, Johannes Gutenberg-Universität Mainz in its series Working Papers with number 1003.

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Length: 54 pages
Date of creation: 14 Jan 2010
Date of revision: 14 Jan 2010
Handle: RePEc:jgu:wpaper:1003

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Related research

Keywords: Government bail-out; implicit and explicit government guarantees; banking competition; risk-taking;

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  1. Shrieves, Ronald E. & Dahl, Drew, 1992. "The relationship between risk and capital in commercial banks," Journal of Banking & Finance, Elsevier, Elsevier, vol. 16(2), pages 439-457, April.
  2. Flannery, Mark J, 1998. "Using Market Information in Prudential Bank Supervision: A Review of the U.S. Empirical Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 30(3), pages 273-305, August.
  3. Sironi, Andrea, 2003. " Testing for Market Discipline in the European Banking Industry: Evidence from Subordinated Debt Issues," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 35(3), pages 443-72, June.
  4. Hakenes, Hendrik & Schnabel, Isabel, 2004. "Banks without Parachutes -- Competitive Effects of Government Bail-out Policies," Sonderforschungsbereich 504 Publications, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim 04-53, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
  5. Reint Gropp & Jukka Vesala, 2002. "Deposit insurance, moral hazard, and market monitoring," Proceedings, Federal Reserve Bank of Chicago 823, Federal Reserve Bank of Chicago.
  6. Allen, Franklin & Gale, Douglas, 2004. "Competition and Financial Stability," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 36(3), pages 453-80, June.
  7. Hyytinen, Ari & Takalo, Tuomas, 2002. "Enchancing Bank Transparency : A Re-assessment," Discussion Papers, The Research Institute of the Finnish Economy 828, The Research Institute of the Finnish Economy.
  8. Gropp, Reint & Vesala, Jukka & Vulpes, Giuseppe, 2002. "Equity and bond market signals as leading indicators of bank fragility," Working Paper Series, European Central Bank 0150, European Central Bank.
  9. Cordella, Tito & Yeyati, Eduardo Levy, 2003. "Bank bailouts: moral hazard vs. value effect," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 12(4), pages 300-330, October.
  10. Demsetz, Rebecca S & Strahan, Philip E, 1997. "Diversification, Size, and Risk at Bank Holding Companies," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 29(3), pages 300-313, August.
  11. Barth, James R. & Caprio, Gerard Jr. & Levine, Ross, 2004. "Bank regulation and supervision: what works best?," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 13(2), pages 205-248, April.
  12. Boyd, John H. & Runkle, David E., 1993. "Size and performance of banking firms : Testing the predictions of theory," Journal of Monetary Economics, Elsevier, Elsevier, vol. 31(1), pages 47-67, February.
  13. Asli Demirguc-Kunt & Enrica Detragiache, 2000. "Does Deposit Insurance Increase Banking System Stability? An Empirical Investigation," Econometric Society World Congress 2000 Contributed Papers, Econometric Society 1751, Econometric Society.
  14. Frederick T. Furlong, 1988. "Changes in bank risk," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue mar25.
  15. Sapienza, Paola, 2004. "The effects of government ownership on bank lending," Journal of Financial Economics, Elsevier, Elsevier, vol. 72(2), pages 357-384, May.
  16. 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, Max Planck Institute for Research on Collective Goods 2005_5, Max Planck Institute for Research on Collective Goods.
  17. Keeley, Michael C, 1990. "Deposit Insurance, Risk, and Market Power in Banking," American Economic Review, American Economic Association, American Economic Association, vol. 80(5), pages 1183-1200, December.
  18. Claudio Borio & Craig Furfine & Philip Lowe, 2001. "Procyclicality of the financial system and financial stability: issues and policy options," BIS Papers chapters, in: Bank for International Settlements (ed.), Marrying the macro- and micro-prudential dimensions of financial stability, volume 1, pages 1-57 Bank for International Settlements.
  19. Schnabel, Isabel, 2004. "The German Twin Crisis of 1931," The Journal of Economic History, Cambridge University Press, Cambridge University Press, vol. 64(03), pages 822-871, September.
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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
  2. Introducing a Series on Large and Complex Banks
    by Blog Author in Liberty Street Economics on 2014-03-25 16:00:00
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