International Evidence on Government Support and Risk Taking in the Banking Sector
37 Pages Posted: 8 Jun 2013
Date Written: May 2013
Government support to banks through the provision of explicit or implicit guarantees affects 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). We also find that restricting banks' range of activities ameliorates the moral hazard problem. We conclude that strengthening market discipline in the banking sector is needed to address this moral hazard problem.
Keywords: Banking sector, Bank supervision, Bank regulations, Risk management, Bank risk, Market Discipline, Government Support, Bank Regulation., bank risk taking, banking, deposit insurance, foreign currency deposit, return on assets, bank regulation, bank size, bank value, bank bailouts, banking industry, bank ownership, bank managers, bank valuation, bank subsidiaries, financial strength, bank distress, banking regulations, bank holding companies, bank supervisory power, bank charter, accounting treatment, banking crises, banking markets, liquidity ratio, bank behavior, bank balance sheets, banking system, bank risk-taking, bank equity, bank debt, bank failure, bank holding, bankers, banking regul
JEL Classification: G21, G28, H81
Suggested Citation: Suggested Citation