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Competition, Risk-Shifting,and Public Bail-out Policies

Author

Listed:
  • Reint Gropp

    (Department of Finance, Accounting and Real Estate, European Business School)

  • Hendrik Hakenes

    (Institute of Financial Economics, Leibniz University of Hannover)

  • Isabel Schnabel

    (Department of Law and Economics, Johannes Gutenberg University 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.

Suggested Citation

  • Reint Gropp & Hendrik Hakenes & Isabel Schnabel, 2010. "Competition, Risk-Shifting,and Public Bail-out Policies," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2010_05, Max Planck Institute for Research on Collective Goods.
    • Handle: RePEc:mpg:wpaper:2010_05
    as

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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    banking competition; Government bail-out; implicit and explicit government guarantees; risk-taking;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • L53 - Industrial Organization - - Regulation and Industrial Policy - - - Enterprise Policy

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