The impact of government ownership on bank risk

Giuliano Orlando Iannotta, Giacomo Nocera, Andrea Sironi

Research output: Contribution to journalArticlepeer-review

113 Citations (Scopus)

Abstract

We use cross-country data on a sample of large European banks to evaluate the impact of government ownership on bank risk. We distinguish between default risk (likelihood of creditors’ losses) and operating risk (likelihood of negative equity). Our analysis is based on the joint use of issuer ratings, a synthetic measure of a bank’s probability of default, and individual ratings, which omit the influence of any external support and focus on a bank’s operating risk. We report two main results. First, government-owned banks (GOBs) have lower default risk but higher operating risk than private banks, indicating the presence of governmental protection that induces higher risk taking. Second, GOBs’ operating risk and governmental protection tend to increase in election years. These results are consistent with the idea that GOBs pursue political goals and have important policy implications for recently nationalized European banks.
Original languageEnglish
Pages (from-to)152-176
Number of pages25
JournalJournal of Financial Intermediation
Volume22
Publication statusPublished - 2013

Keywords

  • European banking
  • government ownership

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