Competition, Risk-Shifting, and Public Bail-out Policies
Reint Gropp (European Business School), Hendrik Hakenes (Leibniz Universität Hannover), Isabel Schnabel (Johannes Gutenberg Universität Mainz):
Abstract
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’ risk-taking behavior, using a large sample of banks from OECD countries.
Our results suggest that government guarantees strongly increase the risk-taking of
competitor banks. In contrast, there is no evidence that public guarantees increase
the protected banks’ risk-taking, except for banks that have outright public ownership.
These results have important implications for the effects of the recent wave of
bank bail-outs on banks’ risk-taking behavior.
JEL: G21, G28, L53
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’ risk-taking behavior, using a large sample of banks from OECD countries.
Our results suggest that government guarantees strongly increase the risk-taking of
competitor banks. In contrast, there is no evidence that public guarantees increase
the protected banks’ risk-taking, except for banks that have outright public ownership.
These results have important implications for the effects of the recent wave of
bank bail-outs on banks’ risk-taking behavior.
JEL: G21, G28, L53
University of Mainz Discussion Paper Series, Link
08.04.2010 | Forschungsarbeit