International Evidence on Government Support and Risk Taking in the Banking Sector
IMF Working Papers, May 2, 2013
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- International Evidence on Government Support and Risk Taking in the Banking Sector
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Bibliographic details
- Authors: Luis Brandao Marques, Ricardo Correa, Horacio Sapriza
- Published: May 2, 2013
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484309346.001
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.
- The study uses an international sample of bank data and government support to banks for the periods 2003-2004 and 2009-2010.
- Main conclusion: More government support is associated with more risk taking by banks, especially during the financial crisis (2009-10).
- Additional conclusion: Restricting banks' range of activities ameliorates the moral hazard problem.
- Policy implication: Strengthening market discipline in the banking sector is needed to address this moral hazard problem.
Key Findings and Evidence
- Time periods analyzed: 2003-2004 and 2009-2010.
- Association: More government support → more bank risk taking.
- Crisis effect: The association is especially pronounced during the financial crisis (2009-10).
- Mitigating factor: Restrictions on banks' range of activities reduce moral hazard.
Policy Recommendations
- Strengthen market discipline in the banking sector to address moral hazard arising from government support.
- Consider restrictions on banks' permissible activities as a tool to ameliorate risk-taking incentives linked to government support.
Data, Scope, and Topics Covered
- Subject areas listed: Bank deposits, Banking, Deposit insurance, Deposit rates, Financial crises, Financial services, Inflation, Loan loss provisions, Prices.
- Keywords include: 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.
- Geographic scope: International sample (regions referenced in keywords include Africa, East Asia, Europe, Global).
- Pages: 36.