Competition, Risk-Shifting, and Public Bail-Out Policies

Review of Financial Studies, Forthcoming

European Business School Research Paper No. 09-13

42 Pages Posted: 8 Jul 2009 Last revised: 23 Nov 2010

Reint Gropp

Halle Institute for Economic Research

Hendrik Hakenes

Finance Group; Centre for Economic Policy Research (CEPR)

Isabel Schnabel

Institute for Finance & Statistics; Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods

Multiple version iconThere are 3 versions of this paper

Date Written: June 17, 2009

Abstract

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

Gropp, Reint and Hakenes, Hendrik and Schnabel, Isabel, Competition, Risk-Shifting, and Public Bail-Out Policies (June 17, 2009). Review of Financial Studies, Forthcoming; European Business School Research Paper No. 09-13. Available at SSRN: https://ssrn.com/abstract=1428784 or http://dx.doi.org/10.2139/ssrn.1428784

Reint Gropp (Contact Author)

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

Hendrik Hakenes

Finance Group ( email )

Adenauerallee 24-42
D-53113 Bonn
Germany
+49-228-73-9225 (Phone)

HOME PAGE: http://www.finance.uni-bonn.de/hakenes

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Isabel Schnabel

Institute for Finance & Statistics ( email )

Postfach 2220
D-53012 Bonn
Germany

HOME PAGE: http://www.finance.uni-bonn.de/schnabel

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods ( email )

Kurt-Schumacher-Str. 10
D-53113 Bonn, 53113
Germany
+49-228-9141665 (Phone)
+49-228-9141621 (Fax)

HOME PAGE: http://www.coll.mpg.de/team/page/isabel_schnabel

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