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

Hendrik Hakenes and Isabel Schnabel

No 04-53, Sonderforschungsbereich 504 Publications from Sonderforschungsbereich 504, Universität Mannheim, Sonderforschungsbereich 504, University of Mannheim

Abstract: The 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 protected 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.

Pages: 34 pages
Date: 2004-11-25
Note: Financial support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged.
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Citations: View citations in EconPapers (6)

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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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