Concentrating on Bailouts: Government Guarantees and Bank Asset Composition

73 Pages Posted: 29 Jul 2023 Last revised: 27 Nov 2023

See all articles by Christian Eufinger

Christian Eufinger

IESE Business School

Juan Pablo Gorostiaga

Pontificia Universidad Catolica de Chile; University of Navarra, IESE Business School

Björn Richter

Universitat Pompeu Fabra; Barcelona Graduate School of Economics (Barcelona GSE)

Date Written: July 26, 2023

Abstract

This paper studies the link between government guarantees for banks and bank asset concentration. We show theoretically that these guarantees, when combined with high leverage, incentivize banks to further invest in asset classes they are already heavily exposed to: the risk-taking via asset concentration mechanism. We confirm this mechanism using U.S. panel data, exploiting exogenous changes in banks' political connections for variation in bailout expectations. At the bank level, we find that higher bailout probabilities are associated with higher portfolio concentration. At the bank-loan class level, we find that banks respond to an increase in their bailout expectations by further loading up on loan classes that already have a high weight in their portfolio.

Suggested Citation

Eufinger, Christian and Gorostiaga, Juan Pablo and Richter, Björn, Concentrating on Bailouts: Government Guarantees and Bank Asset Composition (July 26, 2023). Available at SSRN: https://ssrn.com/abstract=4522039 or http://dx.doi.org/10.2139/ssrn.4522039

Christian Eufinger (Contact Author)

IESE Business School ( email )

Avinguda de Pearson, 21
Barcelona, 08034
Spain

Juan Pablo Gorostiaga

Pontificia Universidad Catolica de Chile ( email )

Avda. Vicuña Mackenna 4860
Santiago de Chile, 780436
Chile

University of Navarra, IESE Business School

Björn Richter

Universitat Pompeu Fabra ( email )

Ramon Trias Fargas, 25-27
Barcelona, E-08005
Spain

Barcelona Graduate School of Economics (Barcelona GSE) ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

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