Institutions, Moral Hazard and Expected Government Support of Banks

Posted: 16 Jun 2013 Last revised: 29 Sep 2014

See all articles by Angelos A. Antzoulatos

Angelos A. Antzoulatos

University of Piraeus - Department of Banking and Financial Management

Chris Tsoumas

Hellenic Open University

Date Written: September 10, 2014

Abstract

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

Antzoulatos, Angelos A. and Tsoumas, Chris, Institutions, Moral Hazard and Expected Government Support of Banks (September 10, 2014). Journal of Financial Stability, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2279422 or http://dx.doi.org/10.2139/ssrn.2279422

Angelos A. Antzoulatos (Contact Author)

University of Piraeus - Department of Banking and Financial Management ( email )

80 Karaoli & Dimitriou Str.
18534 Piraeus, 185 34 -GR
Greece

Chris Tsoumas

Hellenic Open University ( email )

Parodos Aristotelous 18
26335 Patra
Greece

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