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Banks without Parachutes - Competitive Effects of Government Bail-out Policies

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Author Info

  • Hendrik Hakenes

    (MPI for Research on Collective Goods, Kurt-Schumacher-Str. 10, 53113 Bonn, Germany)

  • Isabel Schnabel

    (MPI for Research on Collective Goods, Kurt-Schumacher-Str. 10, D-53113 Bonn, Germany)

Abstract

The explicit or implicit protection of banks through government bail-out policies is a universal phenomenon. We analyze the competitive effects of such policies in two models with different degrees of transparency in the banking sector. Our main result is that the bail-out policy unambiguously leads to higher risk-taking at those banks that do not enjoy a bail-out guarantee. The reason is that the prospect of a bail-out induces the rotected bank to expand, thereby intensifying competition in the deposit market and depressing other banks' margins. In contrast, the effects on the protected bank's risk taking and on welfare depend on the transparency of the banking sector.

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Bibliographic Info

Paper provided by SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich in its series Discussion Papers with number 8.

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Date of creation: Jun 2004
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Handle: RePEc:trf:wpaper:8

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Keywords: Government bail-out; banking competition; transparency; opacity; “too big to fail"; financial stability;

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  1. Thoughts on the future of banking in Irelandâ?¦
    by brianmlucey in Brian M. Lucey on 2012-01-21 07:32:45
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
Cited by:
  1. Hakenes, Hendrik & Schnabel, Isabel, 2005. "Bank Size and Risk-Taking under Basel II," Sonderforschungsbereich 504 Publications 05-07, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim.
  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. Reint Gropp & Hendrik Hakenes & Isabel Schnabel, 2010. "Competition, Risk-Shifting, and Public Bail-out Policies," Working Papers 1003, Gutenberg School of Management and Economics, Johannes Gutenberg-Universität Mainz, revised 14 Jan 2010.
  4. Uwe Vollmer & Diemo Dietrich & Ralf bebenroth, 2009. "Behold the 'Behemoth'. The privatization of Japan Post Bank," Discussion Paper Series 236, Research Institute for Economics & Business Administration, Kobe University.

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