The impact of public guarantees on bank risk-taking: Evidence from a natural experiment

  • Gropp R
  • Gruendl C
  • Guettler A
  • 54

    Readers

    Mendeley users who have this article in their library.
  • 40

    Citations

    Citations of this article.

Abstract

In 2001, government guarantees for savings banks in Germany were removed
following a lawsuit. We use this natural experiment to examine the effect of government
guarantees on bank risk-taking. The results suggest that banks whose government guarantee
was removed reduced credit risk by cutting off the riskiest borrowers from credit. Using a
difference-in-differences approach we show that none of these effects are present in a
control group of German banks to whom the guarantee was not applicable.
Furthermore, savings banks adjusted their liabilities away from risk-sensitive debt instruments
after the removal of the guarantee, while we do not observe this for the control
group. We also document that yield spreads of savings banks' bonds increased significantly
right after the announcement of the decision to remove guarantees, while the yield spread of
a sample of bonds issued by the control group remained unchanged. The evidence implies
that public guarantees may be associated with substantial moral hazard effects.

Get free article suggestions today

Mendeley saves you time finding and organizing research

Sign up here
Already have an account ?Sign in

Find this document

Get full text

Authors

  • Reint Gropp

  • Christian Gruendl

  • Andre Guettler

Cite this document

Choose a citation style from the tabs below

Save time finding and organizing research with Mendeley

Sign up for free