International Evidence on Government Support and Risk Taking in the Banking Sector

48 Pages Posted: 30 May 2017

See all articles by Luis Brandao-Marques

Luis Brandao-Marques

International Monetary Fund - Monetary and Capital Markets Department

Ricardo Correa

Board of Governors of the Federal Reserve System

Horacio Sapriza

Board of Governors of the Federal Reserve System

Multiple version iconThere are 3 versions of this paper

Date Written: 2013

Abstract

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 rated banks and find that government support is associated with more risk taking by banks, especially prior and during the 2008-2009 financial crisis. We also find that restricting banks’ range of activities ameliorates the link between government support and bank risk taking. We conclude that strengthening market discipline by reducing bank complexity is needed to address this moral hazard problem.

Suggested Citation

Brandao-Marques, Luis and Correa, Ricardo and Sapriza, Horacio, International Evidence on Government Support and Risk Taking in the Banking Sector (2013). FRB International Finance Discussion Paper No. 1086. Available at SSRN: https://ssrn.com/abstract=2976780

Luis Brandao-Marques (Contact Author)

International Monetary Fund - Monetary and Capital Markets Department ( email )

700 19th Street, N.W.
Washington, DC 20431
United States
2026238308 (Phone)
2025898308 (Fax)

Ricardo Correa

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Horacio Sapriza

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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