Government guarantees, transparency, and bank risk-taking

Tito Cordella, Giovanni Dell'ariccia and Robert Marquez

No 7971, Policy Research Working Paper Series from The World Bank

Abstract: This paper presents a model of bank risk taking and government guarantees. Levered banks take excessive risk, as their actions are not fully priced at the margin by debt holders. The impact of government guarantees on bank risk taking depends critically on the portion of bank investors that can observe bank behavior and hence price debt at the margin. Greater guarantees increase risk taking (moral hazard) when informed investors hold a sufficiently large fraction of liabilities. Otherwise, greater guarantees reduce risk taking by increasing the profits of the bank (franchise value effect). The results extend to the case in which information disclosure, and thus the portion of informed investors, is endogenous but costly. The model also shows that when bank capital is endogenous, public guarantees lead unequivocally to an increase in bank leverage and an associated increase in risk taking. The analysis points to a complex relationship between prudential policy and the institutional framework governing bank resolution and bailouts.

Keywords: Deposit Insurance; Banks&Banking Reform; Financial Intermediation (search for similar items in EconPapers)
Date: 2017-02-15
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://documents.worldbank.org/curated/en/468401487165710483/pdf/WPS7971.pdf (application/pdf)

Related works:
Journal Article: Government Guarantees, Transparency, and Bank Risk Taking (2018)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wbk:wbrwps:7971

Access Statistics for this paper

More papers in Policy Research Working Paper Series from The World Bank 1818 H Street, N.W., Washington, DC 20433. Contact information at EDIRC.
Bibliographic data for series maintained by Roula I. Yazigi ().