Increased Risk

Posted: May 22, 2014 in Mortgages
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“This paper has investigated the effect of government assistance on bank risk taking. While we do not find a significant effect of government assistance on the aggregate credit supply, our results suggest a considerable effect on the risk of originated loans.

After being approved for federal funds […] participants issue riskier loans and increase capital allocations to riskier, higher-yield securities, as compared to banks that were denied federal funds. [T]he net effect is a significant increase in systemic risk and the probability of distress at approved banks. Overall, our evidence is broadly consistent with the theories that predict an increase in risk taking incentives as a result of government protection.” -Journal of Financial Economics, Professors Ran Duchin and Denis Sosyura

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