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Institutions, moral hazard and expected government support of banks

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  • Antzoulatos, Angelos A.
  • Tsoumas, Chris

Abstract

We model the expected support of banks with credit ratings from Moody's and Fitch, taking explicitly into account the capacity and willingness of governments to provide support in case of need, as well as their concerns about moral hazard (i.e., that the expected support may induce banks to assume bigger risks). Our results suggest that moral hazard concerns are relatively weak. In addition, a substantial part of the expected support can be attributed to the quality of a country's institutions. These findings have important implications for the dynamics of banking crises, the value of the ‘fair’ insurance premium banks might be called upon to pay for the expected support, as well as for ways to reduce the resulting negative externalities.

Suggested Citation

  • Antzoulatos, Angelos A. & Tsoumas, Chris, 2014. "Institutions, moral hazard and expected government support of banks," Journal of Financial Stability, Elsevier, vol. 15(C), pages 161-171.
    • Handle: RePEc:eee:finsta:v:15:y:2014:i:c:p:161-171
    DOI: 10.1016/j.jfs.2014.09.006
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    3. Klára Baková, 2018. "The Financial Accelerator in Europe after the Financial Crisis," European Journal of Business Science and Technology, Mendel University in Brno, Faculty of Business and Economics, vol. 4(2), pages 143-155.
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    6. Svatopluk Kapounek, 2017. "The Impact of Institutional Quality on Bank Lending Activity: Evidence from Bayesian Model Averaging," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 67(5), pages 372-395, October.
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    8. Laxmi Koju & Ram Koju & Shouyang Wang, 2018. "Does Banking Management Affect Credit Risk? Evidence from the Indian Banking System," IJFS, MDPI, vol. 6(3), pages 1-11, July.
    9. Li, Hui & Liu, Hong & Siganos, Antonios & Zhou, Mingming, 2016. "Bank regulation, financial crisis, and the announcement effects of seasoned equity offerings of US commercial banks," Journal of Financial Stability, Elsevier, vol. 25(C), pages 37-46.
    10. Collins C Ngwakwe, 2023. "Stock Market Price Effect of the Silicon Valley Bank Failure - A Pre and Within Analysis," Oblik i finansi, Institute of Accounting and Finance, issue 2, pages 75-82, June.
    11. Poghosyan, Tigran & Werger, Charlotte & de Haan, Jakob, 2016. "Size and support ratings of US banks," The North American Journal of Economics and Finance, Elsevier, vol. 37(C), pages 236-247.
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    More about this item

    Keywords

    Banks; Credit ratings; Government support; Institutions; Moral hazard;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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