International Evidence on Government Support and Risk-Taking in the Banking Sector

34 Pages Posted: 2 Nov 2012

See all articles by Luis Brandao-Marques

Luis Brandao-Marques

International Monetary Fund - Monetary and Capital Markets Department

Ricardo Correa

Board of Governors of the Federal Reserve System

Horacio Sapriza

Board of Governors of the Federal Reserve System

Date Written: October 31, 2012

Abstract

Government support to banks through the provision of explicit or implicit guarantees can affect the willingness of banks to take on risk by reducing market discipline or by increasing charter value. We use an international sample of bank data and government support to banks for the periods 2003-2004 and 2009-2010. We find that more government support is associated with more risk-taking by banks, especially during the financial crisis (2009-10), even after controlling for several bank-specific and country-level factors. We use several measures of government support and bank risk-taking, and the results are robust to various possible misspecification issues. We also find that restricting banks’ range of activities ameliorates the moral hazard problem. We propose that policy measures to counteract this moral hazard problem should be geared towards strengthening market discipline in the banking sector.

Keywords: bank risk, market discipline, government support, bank regulation

JEL Classification: G21, G28, H81

Suggested Citation

Brandao-Marques, Luis and Correa, Ricardo and Sapriza, Horacio, International Evidence on Government Support and Risk-Taking in the Banking Sector (October 31, 2012). European Banking Center Discussion Paper No. 2012-027. Available at SSRN: https://ssrn.com/abstract=2169324 or http://dx.doi.org/10.2139/ssrn.2169324

Luis Brandao-Marques (Contact Author)

International Monetary Fund - Monetary and Capital Markets Department ( email )

700 19th Street, N.W.
Washington, DC 20431
United States
2026238308 (Phone)
2025898308 (Fax)

Ricardo Correa

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Horacio Sapriza

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
90
Abstract Views
677
rank
283,956
PlumX Metrics