Summary of Government Guarantees and Bank Risk Taking Incentives

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Recommendation

As central bankers and government officials consider removing the explicit and implicit financial guarantees they established in the heat of fiscal crises, Germany’s early 2000s experience with its Landesbanken offers some significant lessons. These state-owned banks subsequently had an outsized role in building the global asset-backed securities bubble that burst in 2008. getAbstract recommends this perceptive analysis from the Center for Economic Studies & Ifo Institute for the light it sheds on the unintended consequences of ending government guarantees.

In this summary, you will learn

  • How removing government guarantees changes banks’ risk behavior,
  • How the German Landesbanken reacted as their state guarantees approached expiration and
  • How policy makers should handle the elimination of guarantees.
 

About the Authors

Markus Fischer teaches business administration at Goethe University Frankfurt. Christa Hainz is a senior economist at the Ifo Institute. Jörg Rocholl is the president of the European School of Management and Technology in Berlin, where Sascha Steffen is an associate professor.

 

Summary

In reacting to financial crunches, governments have provided guarantees to a broad range of financial institutions. These actions managed to stem public panic and have helped underwrite the recovery among developed economies. It’s unclear, however, what effects lifting these guarantees will have. Without...

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