Abolishing Public Guarantees in the Absence of Market Discipline

46 Pages Posted: 16 Sep 2013

See all articles by Tobias Körner

Tobias Körner

German Council of Economic Experts

Isabel Schnabel

University of Bonn - Institute for Financial Economics and Statistics; Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods

Date Written: August 1, 2013

Abstract

This paper shows that the abolition of state guarantees to publicly owned banks in Germany resulted in an increase in funding costs at German savings banks. Rather than being the result of increased market discipline, the increase in funding costs is shown to be driven by spillover effects from German Landesbanken who themselves had suffered from the abolition of guarantees and who spread their own cost increase through the public banking network. Higher funding costs and the resulting drop in bank charter values translated into higher risk-taking at German savings bank.

Keywords: Public bail-out guarantees, savings banks, Landesbanken, market discipline, bank risk-taking, banking networks

JEL Classification: G21, G28, H11, L32

Suggested Citation

Körner, Tobias and Schnabel, Isabel, Abolishing Public Guarantees in the Absence of Market Discipline (August 1, 2013). Available at SSRN: https://ssrn.com/abstract=2325287 or http://dx.doi.org/10.2139/ssrn.2325287

Tobias Körner

German Council of Economic Experts ( email )

Federal Statistical Office
Gustav-Stresemann-Ring 11
Wiesbaden, Hessen 65180
Germany
+49(0)611 75 28 86 (Phone)

Isabel Schnabel (Contact Author)

University of Bonn - Institute for Financial Economics and Statistics ( email )

Adenauerallee 24-42
Bonn, 53113
Germany

HOME PAGE: http://www.finance.uni-bonn.de/schnabel

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods ( email )

Kurt-Schumacher-Str. 10
D-53113 Bonn, 53113
Germany
+49-228-9141665 (Phone)
+49-228-9141621 (Fax)

HOME PAGE: http://www.coll.mpg.de/team/page/isabel_schnabel

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