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Abolishing Public Guarantees in the Absence of Market Discipline

  • Tobias Körner
  • Isabel Schnabel

    ()

This paper shows that the abolition of state guarantees to publicly owned banks in Germany resulted in an increase in funding costs at German savings banks. Rather than being the result of increased market discipline, the increase in funding 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 funding costs and the resulting drop in bank charter values translated into higher risk-taking at German savings bank.

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File URL: http://repec.rwi-essen.de/files/REP_13_437.pdf
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Paper provided by Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen in its series Ruhr Economic Papers with number 0437.

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Length: 44 pages
Date of creation: Aug 2013
Date of revision:
Handle: RePEc:rwi:repape:0437
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  1. Flannery, Mark J & Sorescu, Sorin M, 1996. " Evidence of Bank Market Discipline in Subordinated Debenture Yields: 1983-1991," Journal of Finance, American Finance Association, vol. 51(4), pages 1347-77, September.
  2. 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.
  3. 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.
  4. Andrea Sironi, 2000. "Testing for market discipline in the European banking industry: evidence from subordinated debt issues," Finance and Economics Discussion Series 2000-40, Board of Governors of the Federal Reserve System (U.S.).
  5. Reint Gropp & Hendrik Hakenes & Isabel Schnabel, 2010. "Competition, Risk-Shifting,and Public Bail-out Policies," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2010_05, Max Planck Institute for Research on Collective Goods.
  6. Hendrik Hakenes & Isabel Schnabel, 2004. "Banks without Parachutes – Competitive Effects of Government Bail-out Policies," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2004_12, Max Planck Institute for Research on Collective Goods.
  7. Reint Gropp & Jukka Vesala, 2002. "Deposit insurance, moral hazard, and market monitoring," Proceedings 823, Federal Reserve Bank of Chicago.
  8. Gropp, Reint & Vesala, Jukka & Vulpes, Giuseppe, 2002. "Equity and bond market signals as leading indicators of bank fragility," Working Paper Series 0150, European Central Bank.
  9. Gropp, Reint & Gruendl, Christian & Guettler, Andre, 2010. "The impact of public guarantees on bank risk taking: evidence from a natural experiment," Working Paper Series 1272, European Central Bank.
  10. Christian Upper & Andreas Worms, 2001. "Estimating bilateral exposures in the German interbank market: is there a danger of contagion?," BIS Papers chapters, in: Bank for International Settlements (ed.), Marrying the macro- and micro-prudential dimensions of financial stability, volume 1, pages 211-229 Bank for International Settlements.
  11. Boyd, John H. & Runkle, David E., 1993. "Size and performance of banking firms : Testing the predictions of theory," Journal of Monetary Economics, Elsevier, vol. 31(1), pages 47-67, February.
  12. Harald Hau & Marcel Thum, 2009. "Subprime crisis and board (in-) competence: private versus public banks in Germany," Economic Policy, CEPR;CES;MSH, vol. 24, pages 701-752, October.
  13. 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, vol. 30(3), pages 273-305, August.
  14. 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 2005_5, Max Planck Institute for Research on Collective Goods.
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