Banks without Parachutes – Competitive Effects of Government Bail-out Policies

Hakenes, Hendrik; Schnabel, Isabel

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Banks without Parachutes – Competitive Effects of Government Bail-out Policies

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Hakenes, Hendrik
Max Planck Institute for Research on Collective Goods, Max Planck Society;

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Schnabel, Isabel
Max Planck Institute for Research on Collective Goods, Max Planck Society;

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http://www.coll.mpg.de/pdf_dat/2004_12online.pdf
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Citation

Hakenes, H., & Schnabel, I. (2004). Banks without Parachutes – Competitive Effects of Government Bail-out Policies.

Cite as: https://hdl.handle.net/11858/00-001M-0000-0028-6E4E-1

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.