Competition, Risk-shifting, and Public Bail-out Policies

Reint Gropp, Hendrik Hakenes and Isabel Schnabel

The Review of Financial Studies, 2011, vol. 24, issue 6, 2084-2120

Abstract: This article empirically investigates the competitive effects of government bail-out policies. We construct a measure of bail-out perceptions by using rating information. From there, we construct the market shares of insured competitor banks for any given bank, and analyze the impact of this variable on banks' risk-taking behavior, using a large sample of banks from OECD countries. Our results suggest that government guarantees strongly increase the risk-taking of competitor banks. In contrast, there is no evidence that public guarantees increase the protected banks' risk-taking, except for banks that have outright public ownership. These results have important implications for the effects of the recent wave of bank bail-outs on banks' risk-taking behavior. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

Date: 2011
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Working Paper: Competition, Risk-Shifting, and Public Bail-out Policies (2010)
Working Paper: Competition, Risk-Shifting,and Public Bail-out Policies (2010)
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