Bangor Professor wins award to investigate bank bailouts

The Europlace Institute of Finance (EIF) in Paris has awarded a research grant of 10,000 Euro to Bangor’s Professor of Empirical Banking, Dr Klaus Schaeck, to examine how bank bailout packages during crises affect interest rates on loans and deposits. The key idea in this work, jointly undertaken with Cesar Calderon from the World Bank in Washington, D.C., is to establish if the massive bank bailouts seen in recent years with assisted bank mergers, recapitalisations, and nationalizations trigger unintended consequences in bank behaviour by encouraging them to behave more aggressively in deposit and loan markets which could sow the seeds of further banking problems.

Upon receiving the good news from Paris, Professor Schaeck stated that “despite the fact that the debate about competitive effects arising from bailouts has received attention in policy circles (e.g. by the Independent Commission on Banking here in the UK), academia has so far not contributed much to this important discussion. The award from the EIF will allow examining in detail questions that affect society as a whole. For instance, it is far from clear whether the concerns by policy makers that bailouts reduce banking competition are justified or, to the contrary, if the idea that a rescue package will be ready if the bank is in trouble gives banks incentives to compete even more fiercely”.

The question of how bank bailouts affect competition is very important because the pricing of banking products has implications for firm financing, in particular for small and medium-sized companies that depend heavily on bank financing. Professor Schaeck and his co-author expect that their research can offer some insights to better aid the design of bank bailout packages.

Publication date: 11 October 2012