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Abolishing Public Guarantees in the Absence of Market Discipline

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  • Schnabel, Isabel
  • Körner, Tobias

Abstract

This paper shows that the abolition of state guarantees to publicly owned banks in Germany resulted in an increase in refinancing costs at German savings banks. Rather than being the result of increased market discipline, the increase in refinancing costs is shown to be driven by spillover effects from German Landesbanken who themselves had suffered from the abolition of guarantees and who spread their own cost increase through the public banking network. Higher refinancing costs and the resulting drop in bank charter values translated into higher risk-taking at German savings banks. --

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Paper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century with number 65401.

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Date of creation: 2012
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Handle: RePEc:zbw:vfsc12:65401

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  1. 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.
  2. Gropp, Reint & Vesala, Jukka, 2004. "Deposit insurance, moral hazard and market monitoring," Working Paper Series, European Central Bank 0302, European Central Bank.
  3. 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.
  4. 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.
  5. Gropp, R. & Grundl, C. & Guttler, A., 2010. "The Impact of Public Guarantees on Bank Risk Taking: Evidence from a Natural Experiment," Discussion Paper, Tilburg University, Center for Economic Research 2010-69S, Tilburg University, Center for Economic Research.
  6. 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.
  7. Reint Gropp & Hendrik Hakenes & Isabel Schnabel, 2011. "Competition, Risk-shifting, and Public Bail-out Policies," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 24(6), pages 2084-2120.
  8. Harald Hau & Marcel Thum, 2009. "Subprime crisis and board (in-) competence: private versus public banks in Germany," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 24, pages 701-752, October.
  9. Flannery, Mark J & Sorescu, Sorin M, 1996. " Evidence of Bank Market Discipline in Subordinated Debenture Yields: 1983-1991," Journal of Finance, American Finance Association, American Finance Association, vol. 51(4), pages 1347-77, September.
  10. Demirguc-Kunt, Asli & Detragiache, Enrica, 1999. "Does deposit insurance increase banking system stability ? An empirical investigation," Policy Research Working Paper Series 2247, The World Bank.
  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, Max Planck Institute for Research on Collective Goods 2005_5, Max Planck Institute for Research on Collective Goods.
  12. Manju Puri & Jörg Rocholl & Sascha Steffen, 2011. "Global retail lending in the aftermath of the US financial crisis: Distinguishing between supply and demand effects," NBER Working Papers 16967, National Bureau of Economic Research, Inc.
  13. Upper, Christian & Worms, Andreas, 2004. "Estimating bilateral exposures in the German interbank market: Is there a danger of contagion?," European Economic Review, Elsevier, Elsevier, vol. 48(4), pages 827-849, August.
  14. 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.
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Cited by:
  1. Markus Fischer & Christa Hainz & Jörg Rocholl & Sascha Steffen, 2014. "Government Guarantees and Bank Risk Taking Incentives," CESifo Working Paper Series 4706, CESifo Group Munich.
  2. Markus Fischer & Christa Hainz & Jörg Rocholl & Sascha Steffen, 2012. "Wie wirkt sich der Wegfall staatlicher Garantien auf die Risikoübernahme von Banken aus?," Ifo Schnelldienst, Ifo Institute for Economic Research at the University of Munich, vol. 65(18), pages 17-21, October.

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