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

Hendrik Hakenes and Isabel Schnabel

No 2004_12, Discussion Paper Series of the Max Planck Institute for Research on Collective Goods from Max Planck Institute for Research on Collective Goods

Abstract: 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.

Keywords: Government bail-out; banking competition; transparency; “too big to fail”; financial stability (search for similar items in EconPapers)
JEL-codes: G21 G28 L11 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2004-11
New Economics Papers: this item is included in nep-com, nep-fin, nep-fmk and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Related works:
Journal Article: Banks without parachutes: Competitive effects of government bail-out policies (2010)
Working Paper: Banks without parachutes: competitive effects of government bail-out policies (2004)
Working Paper: Banks without Parachutes - Competitive Effects of Government Bail-out Policies (2004)
Working Paper: Banks without Parachutes -- Competitive Effects of Government Bail-out Policies (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:mpg:wpaper:2004_12

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