Banks that received public funds during the 2008 financial crises were
involved in riskier lending than banks that did not need a government bailout,
according to a working paper published by the Bank for International
Settlements (BIS).
The
paper, by economists Michael Brei and Blaise Gadanecz, examined the loan risk of 87 banks - 40 of which received public funds – and found that before the
crisis, the rescued institutions had a significantly higher share of leveraged, and
thus riskier, loans in their
portfolios of syndicated loan signings than their non-rescued peers.
While the finding is
hardly surprising, the authors found evidence that those banks that were
rescued took on the risk mainly in their home markets, “possibly reflecting their expectation
that rescues are more likely to occur at home, where they may count as more
systemic or wield more market power than abroad,” the paper said.
The authors also tried to
ascertain whether the public rescue operations, such as the 2008 Troubled Asset
Relief Program (TARP) in the US, made the rescued banks shy away from risky
lending toward safer loans.
“Although risk started
diminishing across the board in 2009, we fail to find significant consistent
evidence that with the onset of the crisis in 2008, rescued banks have reduced
their risk relatively more than non rescued banks,” the paper said.
The authors said their findings
were consistent with current literature that says rescued banks take on higher
risks because they expect to be rescued, a concept often referred to as moral hazard.
“Rescued banks may either
be erring in risk management or consciously taking advantage of the implicit
bailout guarantee,” the paper said.
Click to read the paper: "Public recapitalisations and bank risk: evidence from loan spreads and leverage."
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