Institutions, Moral Hazard and Expected Government Support of Banks
Posted: 16 Jun 2013 Last revised: 29 Sep 2014
Date Written: September 10, 2014
We model the expected support of banks with credit ratings from Moody’s and Fitch, taking explicitly into account the capacity and willingness of governments to provide support in case of need, as well as their concerns about moral hazard (i.e., that the expected support may induce banks to assume bigger risks). Our results suggest that moral hazard concerns are relatively weak. In addition, a substantial part of the expected support can be attributed to the quality of a country’s institutions. These findings have important implications for the dynamics of banking crises, the value of the ‘fair’ insurance premium banks might be called upon to pay for the expected support, as well as for ways to reduce the resulting negative externalities.
Keywords: Banks, Credit Ratings, Government Support, Institutions, Moral Hazard
JEL Classification: G21, G24, G28
Suggested Citation: Suggested Citation