Banks without parachutes : competitive effects of government bail-out policies


Hakenes, Hendrik ; Schnabel, Isabel


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URL: http://ub-madoc.bib.uni-mannheim.de/2690
URN: urn:nbn:de:bsz:180-madoc-26905
Document Type: Working paper
Year of publication: 2004
Publication language: English
Institution: School of Law and Economics > Sonstige - Fakultät für Rechtswissenschaft und Volkswirtschaftslehre
MADOC publication series: Sonderforschungsbereich 504 > Rationalitätskonzepte, Entscheidungsverhalten und ökonomische Modellierung (Laufzeit 1997 - 2008)
Subject: 330 Economics
Classification: JEL: G21 G28 L11 ,
Subject headings (SWD): Bank , Kreditrisiko , Unternehmenssanierung , Einlagensicherung , Wettbewerb , Bankenkrise
Keywords (English): Government bail-out , banking competition , transparency , “too big to fail” , financial stability
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.
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Hakenes, Hendrik ; Schnabel, Isabel (2004) Banks without parachutes : competitive effects of government bail-out policies. Open Access [Working paper]
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