Banks without parachutes: Competitive effects of government bail-out policies

Hendrik Hakenes and Isabel Schnabel

Journal of Financial Stability, 2010, vol. 6, issue 3, 156-168

Abstract: We analyze the competitive effects of government bail-out policies in two models with different degrees of transparency in the banking sector. Our main result is that bail-outs lead to higher risk-taking among the protected bank's competitors, independently of transparency. The reason is that the prospect of a bail-out induces the protected bank to expand, which intensifies competition in the deposit market, depresses other banks' margins, and thereby increases risk-taking incentives. Contrary to conventional wisdom, protected banks may take lower risks when transparency in the banking sector is low and the deposit supply is sufficiently elastic.

Keywords: Government; bail-out; Banking; competition; Transparency; "Too; big; to; fail"; Financial; stability (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (76)

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Related works:
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)
Working Paper: Banks without Parachutes -- Competitive Effects of Government Bail-out Policies (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:6:y:2010:i:3:p:156-168

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