GGs encourage riskier behaviour, study finds

07 Dec 2010

Removing bank debt guarantees and imposing capital surcharges on the biggest institutions will help restore stability in the system, researchers found in a European Central Bank working paper published on Monday.

In a study of the court-ordered removal of government guarantees for German savings banks, researchers Reint Gropp, Christian Gruendl and Andre Guettler found that guaranteeing bank debt can come with “substantial” moral hazard.

“We find that the removal of government guarantees not only significantly decreased the risk taking of ...

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