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

54 Pages Posted: 27 Jan 2010

See all articles by Reint Gropp

Reint Gropp

Halle Institute for Economic Research

Hendrik Hakenes

Finance Group; Centre for Economic Policy Research (CEPR)

Isabel Schnabel

University of Bonn - Institute for Financial Economics and 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: January 2010

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 strongly increase the risk-taking of competitor banks. In contrast, there is no evidence that public guarantees increase the protected banks’ risk-taking, except for banks that have outright public ownership. These results have important implications for the effects of the recent wave of bank bail-outs on banks’ risk-taking behavior.

Keywords: Banking Competition, Government Bail-Out, Implicit and Explicit Government Guarantees, 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 (January 2010). MPI Collective Goods Preprint, No. 2010/05. Available at SSRN: https://ssrn.com/abstract=1543163 or http://dx.doi.org/10.2139/ssrn.1543163

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 )

London
United Kingdom

Isabel Schnabel

University of Bonn - Institute for Financial Economics and Statistics ( email )

Adenauerallee 24-42
Bonn, 53113
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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