FRB: International Evidence on Government Support and Risk Taking in the Banking Sector

International Finance Discussion Papers

International Evidence on Government Support and Risk Taking in the Banking Sector
Luis Brandao-Marques, Ricardo Correa, and Horacio Sapriza
2013-1086 (August 2013)

Abstract: Government support to banks through the provision of explicit or implicit guarantees affects the willingness of banks to take on risk by reducing market discipline or by increasing charter value. We use an international sample of rated banks and find that government support is associated with more risk taking by banks, especially prior and during the 2008-2009 financial crisis. We also find that restricting banks� range of activities ameliorates the link between government support and bank risk taking. We conclude that strengthening market discipline by reducing bank complexity is needed to address this moral hazard problem.

Full paper (289 KB PDF)

Keywords
Bank risk, market discipline, government support, bank regulation

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