The Impact of Government Ownership on Bank Risk

40 Pages Posted: 15 Mar 2013

See all articles by Giuliano Iannotta

Giuliano Iannotta

Università Cattolica

Giacomo Nocera

Audencia Business School

Andrea Sironi

Bocconi University - Department of Finance

Date Written: March 14, 2013

Abstract

We use cross-country data on a sample of large European banks to evaluate the impact of government ownership on bank risk. We distinguish between default risk (likelihood of creditors’ losses) and operating risk (likelihood of negative equity). Our analysis is based on the joint use of issuer ratings, a synthetic measure of a bank’s probability of default, and individual ratings, which omit the influence of any external support and focus on a bank’s operating risk. We report two main results. First, government-owned banks (GOBs) have lower default risk but higher operating risk than private banks, indicating the presence of governmental protection that induces higher risk taking. Second, GOBs’ operating risk and governmental protection tend to increase in election years. These results are consistent with the idea that GOBs pursue political goals and have important policy implications for recently nationalized European banks.

Keywords: European banking, Government ownership, Bank risk

JEL Classification: G15, G21, G28, G32

Suggested Citation

Iannotta, Giuliano and Nocera, Giacomo and Sironi, Andrea, The Impact of Government Ownership on Bank Risk (March 14, 2013). Journal of Financial Intermediation, Vol. 22, No. 2, 2013, Available at SSRN: https://ssrn.com/abstract=2233564

Giuliano Iannotta

Università Cattolica ( email )

20123 Milano
Italy

Giacomo Nocera (Contact Author)

Audencia Business School ( email )

8 route de la Jonelière, BP 31222
Nantes Cedex 3, Cedex 3 44312
France

Andrea Sironi

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

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