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

  • Hakenes, Hendrik

    ()

    (Sonderforschungsbereich 504)

  • Schnabel, Isabel

    ()

    (Sonderforschungsbereich 504)

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 protected 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 Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim in its series Sonderforschungsbereich 504 Publications with number 04-53.

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Length: 34 pages
Date of creation: 25 Nov 2004
Date of revision:
Handle: RePEc:xrs:sfbmaa:04-53
Note: Financial support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged.
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