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

By Luis Brandão-Marques, Ricardo Correa, Horacio Sapriza

May 2, 2013

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Luis Brandão-Marques, Ricardo Correa, and Horacio Sapriza. International Evidence on Government Support and Risk Taking in the Banking Sector, (USA: International Monetary Fund, 2013) accessed December 26, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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 bank data and government support to banks for the periods 2003-2004 and 2009-2010. We find that more government support is associated with more risk taking by banks, especially during the financial crisis (2009-10). We also find that restricting banks' range of activities ameliorates the moral hazard problem. We conclude that strengthening market discipline in the banking sector is needed to address this moral hazard problem.

Subject: Bank deposits, Banking, Deposit insurance, Deposit rates, Financial crises, Financial services, Inflation, Loan loss provisions, Prices

Keywords: Africa, Bank deposits, Bank ownership structure, Bank regulation, Bank risk, Bank risk taking, Bank support, Deposit insurance, Deposit rates, East Asia, Europe, Funding cost, Global, Government intervention, Government support, Inflation, Market Discipline, Moody's support, Support measure, WP

Publication Details

Pages:

36
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2013/094
Stock No:

WPIEA2013094
ISBN:

9781484309346
ISSN:

1018-5941

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