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Institutions, moral hazard and expected government support of banks

Angelos Antzoulatos () and Chris Tsoumas ()

Journal of Financial Stability, 2014, vol. 15, issue C, 161-171

Abstract: We model the expected support of banks with credit ratings from Moody's and Fitch, taking explicitly into account the capacity and willingness of governments to provide support in case of need, as well as their concerns about moral hazard (i.e., that the expected support may induce banks to assume bigger risks). Our results suggest that moral hazard concerns are relatively weak. In addition, a substantial part of the expected support can be attributed to the quality of a country's institutions. These findings have important implications for the dynamics of banking crises, the value of the ‘fair’ insurance premium banks might be called upon to pay for the expected support, as well as for ways to reduce the resulting negative externalities.

Keywords: Banks; Credit ratings; Government support; Institutions; Moral hazard (search for similar items in EconPapers)
JEL-codes: G21 G24 G28 (search for similar items in EconPapers)
Date: 2014
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DOI: 10.1016/j.jfs.2014.09.006

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Journal of Financial Stability is currently edited by I. Hasan, W. C. Hunter and G. G. Kaufman

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