Author: Ricardo Correa / Topic: Governance

Author:: Luis Brandao-Marques, Ricardo Correa, and Horacio Sapriza
Publication Date:: 08-2013
Content Type:: Working Paper
Institution:: Board of Governors of the Federal Reserve System
Abstract:: Government support to banks through the provision of explicit or implicit guarantees affects the willingness of banks to take on risk by reducing market discipline or by increasing charter value. We use an international sample of rated banks and find that government support is associated with more risk taking by banks, especially prior and during the 2008-2009 financial crisis. We also find that restricting banks range of activities ameliorates the link between government support and bank risk taking. We conclude that strengthening market discipline by reducing bank complexity is needed to address this moral hazard problem.
Topic:: Governance, Regulation, Risk, and Banking
Political Geography:: North America and United States of America

Author:: Ricardo Correa, Kuan-Hui Lee, Horacio Sapriza, and Gustavo Suarez
Publication Date:: 12-2012
Content Type:: Working Paper
Institution:: Board of Governors of the Federal Reserve System
Abstract:: We explore the joint effect of expected government support to banks and changes in sovereign credit ratings on bank stock returns using data for banks in 37 countries between 1995 and 2011. We find that sovereign credit rating downgrades have a large negative effect on bank stock returns for those banks that are expected to receive stronger support from their governments. This result is stronger for banks in advanced economies where governments are better-positioned to provide that support. Our results suggest that stock market investors perceive sovereigns and domestic banks as markedly interconnected, partly through government guarantees.
Topic:: Sovereignty, Governance, Risk, Credit, Bonds, and Stock Markets
Political Geography:: Global Focus

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