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Title:Banks without Parachutes : Competitive Effects of Government Bail-out Policies PDF Logo
Authors:Hakenes, Hendrik
Schnabel, Isabel
Issue Date:2004
Series/Report no.:Preprints of the Max Planck Institute for Research on Collective Goods 2004/12
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.
Subjects:Government bail-out
banking competition
transparency
"too big to fail"
financial stability
JEL:L11
G28
G21
Document Type:Working Paper
Appears in Collections:Preprints of the Max Planck Institute for Research on Collective Goods

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