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

Author/Editor: Luís Brandão Marques ; Ricardo Correa ; Horacio Sapriza
Publication Date: May 02, 2013
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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.
Series: Working Paper No. 13/94
Subject(s): Banking sector | Bank supervision | Bank regulations | Risk management

Publication Date: May 02, 2013
ISBN/ISSN: 9781484309346/1018-5941 Format: Paper
Stock No: WPIEA2013094 Pages: 36
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