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

Reint Gropp, Hendrik Hakenes and Isabel Schnabel

No 2010_05, Discussion Paper Series of the Max Planck Institute for Research on Collective Goods from Max Planck Institute for Research on Collective Goods

Abstract: This paper empirically investigates the effect of government bail-out policies on banks outside the safety net. 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.

Keywords: banking competition; Government bail-out; implicit and explicit government guarantees; risk-taking (search for similar items in EconPapers)
JEL-codes: G21 G28 L53 (search for similar items in EconPapers)
Date: 2010-02
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Citations: View citations in EconPapers (33)

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Related works:
Journal Article: Competition, Risk-shifting, and Public Bail-out Policies (2011)
Working Paper: Competition, Risk-Shifting, and Public Bail-out Policies (2010)
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