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Abolishing Public Guarantees in the Absence of Market Discipline

Tobias Körner and Isabel Schnabel ()

No 437, Ruhr Economic Papers from RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen

Abstract: This paper shows that the abolition of state guarantees to publicly owned banks in Germany resulted in an increase in funding costs at German savings banks. Rather than being the result of increased market discipline, the increase in funding costs is shown to be driven by spillover effects from German Landesbanken who themselves had suffered from the abolition of guarantees and who spread their own cost increase through the public banking network. Higher funding costs and the resulting drop in bank charter values translated into higher risk-taking at German savings bank.

Keywords: public bail-out guarantees; savings banks; Landesbanken; market discipline; bank risk-taking; banking networks (search for similar items in EconPapers)
JEL-codes: G21 G28 H11 L32 (search for similar items in EconPapers)
Date: 2013
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https://www.econstor.eu/bitstream/10419/83672/1/769094856.pdf (application/pdf)

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Working Paper: Abolishing Public Guarantees in the Absence of Market Discipline (2012) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:rwirep:437

DOI: 10.4419/86788494

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