Government guarantees and bank risk taking incentives

Markus Fischer, Christa Hainz, Jörg Rocholl and Sascha Steffen
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Markus Fischer: Goethe-Universität Frankfurt am Main
Jörg Rocholl: ESMT European School of Management and Technology

No ESMT-14-02, ESMT Research Working Papers from ESMT European School of Management and Technology

Abstract: This paper analyzes the effect of the removal of government guarantees on bank risk taking. We exploit the removal of guarantees for German Landesbanken which results in lower credit ratings, higher funding costs, and a loss in franchise value. This removal was announced in 2001, but Landesbanken were allowed to issue guaranteed bonds until 2005. We find that Landesbanken lend to riskier borrowers after 2001. This effect is most pronounced for Landesbanken with the highest expected decrease in franchise value. Landesbanken also significantly increased their off-balance sheet exposure to the global ABCP market. Our results provide implications for the debate on how to remove guarantees.

Keywords: Government guarantees; exits; risk taking; franchise value; financial crisis; loans (search for similar items in EconPapers)
JEL-codes: G20 G21 G28 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2014-02-12
New Economics Papers: this item is included in nep-ban, nep-cba and nep-sog
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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http://static.esmt.org/publications/workingpapers/ESMT-14-02.pdf First version, 2014 (application/pdf)

Related works:
Working Paper: Government Guarantees and Bank Risk Taking Incentives (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:esm:wpaper:esmt-14-02

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