Competition, Risk-Shifting, and Public Bail-Out Policies
26 Pages Posted: 2 Mar 2007
Date Written: February 26, 2007
This paper empirically investigates the effect of government bail-out policies on banks outside the safety net. We construct a measure of bail-out perceptions by using rating information. From there, we construct the market shares of insured competitor banks for any given bank, and analyze the impact of this variable on banks' margins and risk-taking behavior, using a large sample of banks from OECD countries. Our results suggest that government guarantees to some banks strongly increase the risk-taking of the competitor banks not protected by such guarantees. In contrast, there is no evidence that public guarantees increase the protected banks' risk-taking.
Keywords: Government bail-out, banking competition, risk-taking
JEL Classification: G21, G28, L53
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