The impact of state guarantees on banks’ risk-taking

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.