Implicit government guarantees and bank herding behavior

Rasmus Rüffer

No 1999,06, Discussion Paper Series 1: Economic Studies from Deutsche Bundesbank

Abstract: During the past two decades 130 of the 182 IMF member countries have experienced serious problems in their banking sectors or an outright banking crisis. Among the stylized facts about these crises are their often systemic nature, a pronounced boom-bust cyde and substantial financial involvement by the government in the resolution process. This paper tries to tie these features together in a model of banks' herding behavior. Most existing models of herding behavior can explain the similarity of actions taken by different agents but do not necessarily imply excessive riskiness of these actions. On the other hand, many models that try to explain excessive risk-taking do not contain any incentive for herding. This paper develops astate-preference model of simultaneous herding and excessive risktaking. Thus, the model can help in understanding the frequency as weIl as the systemic nature ofbanking crises ...

Date: 1999
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