Competition, Risk-Shifting, and Public Bail-Out Policies
Review of Financial Studies, Forthcoming
42 Pages Posted: 8 Jul 2009 Last revised: 23 Nov 2010
Date Written: June 17, 2009
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 to some banks strongly increase the risk-taking of the competitor banks not protected by such guarantees. In contrast, there is no evidence that public guarantees increase the protected banks’ risk-taking. These results have important implications for the effects of the recent wave of bank bail-outs on banks’ risk-taking behavior.
Keywords: government bail-out, implicit and explicit government guarantees, banking competition, risk-taking
JEL Classification: G21, G28, L53
Suggested Citation: Suggested Citation