Journal Article

Bank Bailouts and Moral Hazard: Evidence from Germany

Lammertjan Dam and Michael Koetter

in The Review of Financial Studies

Published on behalf of The Society for Financial Studies

Volume 25, issue 8, pages 2343-2380
Published in print August 2012 | ISSN: 0893-9454
Published online April 2012 | e-ISSN: 1465-7368 | DOI: https://dx.doi.org/10.1093/rfs/hhs056
Bank Bailouts and Moral Hazard: Evidence from Germany

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  • Multiple or Simultaneous Equation Models; Multiple Variables
  • Game Theory and Bargaining Theory
  • Banking
  • Financial Regulation
  • Regulation and Industrial Policy

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We use a structural econometric model to provide empirical evidence that safety nets in the banking industry lead to additional risk taking. To identify the moral hazard effect of bailout expectations on bank risk, we exploit the fact that regional political factors explain bank bailouts but not bank risk. The sample includes all observed capital preservation measures and distressed exits in the German banking industry during 1995–2006. A change of bailout expectations by two standard deviations increases the probability of official distress from 6.6% to 9.4%, which is economically significant.

Keywords: C30; C78; G21; G28; L51

Journal Article.  16089 words.  Illustrated.

Subjects: Multiple or Simultaneous Equation Models; Multiple Variables ; Game Theory and Bargaining Theory ; Banking ; Financial Regulation ; Regulation and Industrial Policy

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