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

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  • Hakenes, Hendrik
  • Schnabel, Isabel

Abstract

Lecture on the first SFB/TR 15 meeting, Gummersbach, July, 18 - 20, 2004The 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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Paper provided by Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich in its series Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 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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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  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. 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. 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.
  3. 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.
  4. Reint Gropp & Hendrik Hakenes & Isabel Schnabel, 2011. "Competition, Risk-shifting, and Public Bail-out Policies," Review of Financial Studies, Society for Financial Studies, vol. 24(6), pages 2084-2120.
  5. Blaise Gadanecz & Kostas Tsatsaronis & Yener Altunbasb, 2012. "Spoilt and Lazy: The Impact of State Support on Bank Behavior in the International Loan Market," International Journal of Central Banking, International Journal of Central Banking, vol. 8(4), pages 121-173, December.
  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. Michele Fratianni & Francesco Marchionne, 2013. "The fading stock market response to announcements of bank bailouts," Mo.Fi.R. Working Papers 76, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
  8. 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.

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