Ruhr Economic Papers

Ruhr Economic Papers #437

Abolishing Public Guarantees in the Absence of Market Discipline

by Tobias Körner and Isabel Schnabel

RGS, 08/2013, 44 S./p., 8 Euro, ISBN 978-3-86788-494-5 DOI: /10.4419/86788494



This paper shows that the abolition of state guarantees to publicly owned banks in Germany resulted in an increase in funding costs at German savings banks. Rather than being the result of increased market discipline, the increase in funding costs is shown to be driven by spillover effects from German Landesbanken who themselves had suffered from the abolition of guarantees and who spread their own cost increase through the public banking network. Higher funding costs and the resulting drop in bank charter values translated into higher risk-taking at German savings bank.

JEL-Classification: G21, G28, H11, L32

Keywords: Public bail-out guarantees; savings banks; Landesbanken; market discipline; bank risk-taking; banking networks