Abstract
| Original language | English |
|---|---|
| Place of Publication | Tilburg |
| Publisher | Finance |
| Number of pages | 48 |
| Volume | 2010-69S |
| Publication status | Published - 2010 |
Publication series
| Name | CentER Discussion Paper |
|---|---|
| Volume | 2010-69S |
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Keywords
- banking
- public guarantees
- credit risk
- moral hazard
Cite this
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The Impact of Public Guarantees on Bank Risk Taking : Evidence from a Natural Experiment. / Gropp, R.; Grundl, C.; Guttler, A.
Tilburg : Finance, 2010. (CentER Discussion Paper; Vol. 2010-69S).Research output: Working paper › Discussion paper › Other research output
TY - UNPB
T1 - The Impact of Public Guarantees on Bank Risk Taking
T2 - Evidence from a Natural Experiment
AU - Gropp, R.
AU - Grundl, C.
AU - Guttler, A.
N1 - This is also EBC Discussion Paper 2010-21S Pagination: 48
PY - 2010
Y1 - 2010
N2 - In 2001, government guarantees for savings banks in Germany were removed following a law suit. We use this natural experiment to examine the effect of government guarantees on bank risk taking, using a large data set of matched bank/borrower information. The results suggest that banks whose government guarantee was removed reduced credit risk by cutting off the riskiest borrowers from credit. At the same time, the banks also increased interest rates on their remaining borrowers. The effects are economically large: the Z-Score of average borrowers increased by 7% and the average loan size declined by 13%. Remaining borrowers paid 57 basis points higher interest rates, despite their higher quality. Using a difference-in-differences approach we show that the effect is larger for banks that ex ante benefitted more from the guarantee. We show that both the credit quality of new customers improved (screening) and that the loans of existing riskier borrowers were less likely to be renewed (monitoring), after the removal of public guarantees. Public guarantees seem to be associated with substantial moral hazard effects.
AB - In 2001, government guarantees for savings banks in Germany were removed following a law suit. We use this natural experiment to examine the effect of government guarantees on bank risk taking, using a large data set of matched bank/borrower information. The results suggest that banks whose government guarantee was removed reduced credit risk by cutting off the riskiest borrowers from credit. At the same time, the banks also increased interest rates on their remaining borrowers. The effects are economically large: the Z-Score of average borrowers increased by 7% and the average loan size declined by 13%. Remaining borrowers paid 57 basis points higher interest rates, despite their higher quality. Using a difference-in-differences approach we show that the effect is larger for banks that ex ante benefitted more from the guarantee. We show that both the credit quality of new customers improved (screening) and that the loans of existing riskier borrowers were less likely to be renewed (monitoring), after the removal of public guarantees. Public guarantees seem to be associated with substantial moral hazard effects.
KW - banking
KW - public guarantees
KW - credit risk
KW - moral hazard
M3 - Discussion paper
VL - 2010-69S
T3 - CentER Discussion Paper
BT - The Impact of Public Guarantees on Bank Risk Taking
PB - Finance
CY - Tilburg
ER -