Banks without Parachutes - Competitive Effects of Government Bail-out Policies

Hendrik Hakenes and Isabel Schnabel

Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems from Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich

Abstract: Lecture on the first SFB/TR 15 meeting, Gummersbach, July, 18 - 20, 2004The explicit or implicit protection of banks through government bail-out policies is a universal phenomenon. We analyze the competitive effects of such policies in two models with different degrees of transparency in the banking sector. Our main result is that the bail-out policy unambiguously leads to higher risk-taking at those banks that do not enjoy a bail-out guarantee. The reason is that the prospect of a bail-out induces the rotected bank to expand, thereby intensifying competition in the deposit market and depressing other banks’ margins. In contrast, the effects on the protected bank’s risk taking and on welfare depend on the transparency of the banking sector.

Keywords: Government bail-out; banking competition; transparency; opacity; “too big to fail"; financial stability (search for similar items in EconPapers)
JEL-codes: G21 G28 L11 (search for similar items in EconPapers)
Date: 2004-06
New Economics Papers: this item is included in nep-com, nep-fin and nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Journal Article: Banks without parachutes: Competitive effects of government bail-out policies (2010)
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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