Banks Without Parachutes - Competitive Effects of Government Bail-Out Policies
32 Pages Posted: 7 Oct 2004
Date Written: November 2004
Abstract
The explicit or implicit protection of banks through government bail-out policies is a universal phenomenon. We analyze the competitive effects of such policies in two models with different degrees of transparency in the banking sector. Our main result is that the bail-out policy unambiguously leads to higher risk-taking at those banks that do not enjoy a bail-out guarantee. The reason is that the prospect of a bail-out induces the protected bank to expand, thereby intensifying competition in the deposit market and depressing other banks' margins. In contrast, the effects on the protected bank's risk-taking and on welfare depend on the transparency of the banking sector.
Keywords: Government bail-out, banking competition, transparency, too big to fail, financial stability
JEL Classification: G21, G28, L11
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Bank Risk Taking and Competition Revisited
By John H. Boyd and Gianni De Nicolo
-
Liberalization, Moral Hazard in Banking and Prudential Regulation: Are Capital Requirements Enough?
-
Competition and Financial Stability
By Franklin Allen and Douglas M. Gale
-
Capital Requirements, Market Power and Risk-Taking in Banking
-
Size, Charter Value and Risk in Banking: An International Perspective
-
Competition and Stability: What's Special About Banking?
By Elena Carletti and Philipp Hartmann
-
Bank Risk-Taking and Competition Revisited: New Theory and New Evidence
By John H. Boyd, Gianni De Nicolo, ...
-
By Thorsten Beck, Asli Demirgüç-kunt, ...
-
By Thorsten Beck, Asli Demirgüç-kunt, ...
