Government Guarantees and Bank Risk Taking Incentives

52 Pages Posted: 15 Mar 2011 Last revised: 12 Feb 2014

See all articles by Markus Fischer

Markus Fischer

Goethe University Frankfurt - Department of Finance

Christa Hainz

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute

Jörg Rocholl

ESMT European School of Management and Technology

Sascha Steffen

Frankfurt School of Finance & Management

Multiple version iconThere are 3 versions of this paper

Date Written: February 4, 2014

Abstract

This paper analyzes the effect of the removal of government guarantees on bank risk taking. We exploit the removal of guarantees for German Landesbanken which results in lower credit ratings, higher funding costs, and a loss in franchise value. This removal was announced in 2001, but Landesbanken were allowed to issue guaranteed bonds until 2005. We find that Landesbanken lend to riskier borrowers after 2001. This effect is most pronounced for Landesbanken with the highest expected decrease in franchise value. Landesbanken also significantly increased their off-balance sheet exposure to the global ABCP market. Our results provide implications for the debate on how to remove guarantees.

Keywords: Government Guarantees, Exits, Risk Taking, Franchise Value, Financial Crisis, Loans

JEL Classification: G20, G21, G28

Suggested Citation

Fischer, Markus J. and Hainz, Christa and Rocholl, Joerg and Steffen, Sascha, Government Guarantees and Bank Risk Taking Incentives (February 4, 2014). AFA 2012 Chicago Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1786923 or http://dx.doi.org/10.2139/ssrn.1786923

Markus J. Fischer (Contact Author)

Goethe University Frankfurt - Department of Finance ( email )

Grüneburgplatz 1
House of Finance
Frankfurt am Main, 60323
Germany
+49 69 798 33700 (Phone)
+49 69 798 33901 (Fax)

Christa Hainz

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute ( email )

Poschinger Str. 5
Munich, 81069
Germany

Joerg Rocholl

ESMT European School of Management and Technology ( email )

Schlossplatz 1
Berlin
Germany

HOME PAGE: http://www.esmt.org/en/159244

Sascha Steffen

Frankfurt School of Finance & Management ( email )

Adickesallee
32-34
Frankfurt, 60322
Germany
16097326929 (Phone)

HOME PAGE: http://www.sascha-steffen.de

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