Author: M. Mariathasan, O. Merrouche, C. Werger
The recent crisis has shown that systemically relevant banks in distress are likely to benefit from governmental support. This reduces their downside risk and leads to moral hazard, i.e. to incentives for these banks to assume excessive risks. In this paper we show empirically that implicit guarantees lead to more leverage and to a lower quality of bank capital; furthermore, we investigate which institutional characteristics are associated with a reduction in moral hazard. Our analysis combines bank balance sheet information from 92 countries with Fitch Support Ratings and World Bank survey data on governance and regulation.