Journal of Financial Stability Vol. 6 No. 3 2010
Banks without parachutes: Competitive effects of government bail-out policies
Abstract
We analyze the competitive effects of government bail-out policies in two models with different degrees of transparency in the banking sector. Our main result is that bail-outs lead to higher risk-taking among the protected bank’s competitors, independently of transparency. The reason is that the prospect of a bail-out induces the protected bank to expand, which intensifies competition in the deposit market, depresses other banks’ margins, and thereby increases risk-taking incentives. Contrary to conventional wisdom, protected banks may take lower risks when transparency in the banking sector is low and the deposit supply is sufficiently elastic.
- DOI
- 10.1016/j.jfs.2009.05.006
- Volume
- 6
- Issue
- 3
- Pages
- 156-168
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref