The impact of state guarantees on banks’ risk-taking
Research report (imported) 2006 - Max Planck Institute for Research on Collective Goods
Researchers at the Max Planck Institute for Research on Collective Goods argue that, contrary to conventional wisdom, state guarantees do not necessarily induce higher risk-taking at the protected banks. Furthermore, they point towards a risk-increasing effect of guarantees at the protected banks’ competitors. Empirical evidence supports both predictions: Protected banks do not take higher risks in reaction to state guarantees. In contrast, the evidence confirms that competitor banks are driven towards higher risk-taking.