become more aggressive because their charter values are eroded. Another argument relates to moral hazard. Gropp, Gruendl, and Guettler (2011) and Berger et al. (2010) suggest bailouts increase moral hazard as monitoring incentives are distorted, resulting in loans being originated to risky borrowers, inflated loan volumes, and inadequate loan pricing, respectively. Duchin and Sosyura (2012a) offer further evidence: Loans originated by banks that participated in the Troubled Asset Relief Program (TARP) are riskier, and these banks shift assets into riskier categories.<sup>3</sup> However, other theories point out that bailouts increase charter values. Cordella and Yeyati (2003) emphasize that the charter-value effect of bailouts reduces risk-taking which suggests less aggressive conduct. These arguments highlight that it is far from clear how the competitive landscape changes in the aftermath of bailouts. Ultimately, the effect of bailouts on competition therefore remains an empirical question we address in this paper. To the extent that competition changes following government aid, our work helps understand the mechanism by which interventions contribute to risk-shifting behavior on the bank level.

The question of how competition is affected is also important for other reasons. Mispricing of products can have consequences for consumer welfare. Guarantees can entrench the institutions, assisted mergers of large banks increase concentration and signal that these banks are ‘ _too-big-to-fail’_ (Beck et al. (2010)).<sup>4</sup> Moreover, entry barriers have risen as a consequence of tighter regulation (Andresen (2011)). In turn, prices of services provided by bailed institutions may be affected. Competitors may benefit _indirectly_ because crises are stalled, or _directly_ because they are creditors of the rescued bank. Others suggest rescues influence credit supply and liquidity creation. These effects can spill over into the real economy (Norden, Rosenboom, and Wang (forthcoming)).

These considerations beg a second question: How do these policy responses impact consumer welfare? In particular, what are the effects on borrowers and depositors? We address this by investigating the effects of blanket guarantees, liquidity support, recapitalizations, and nationalizations separately on competition in loan and deposit markets. In addition, we then explore the ramifications for provision of credit and access to finance.

For our empirical tests, we exploit a vast array of information about interventions in banking systems. Our dataset contains 41 crises (29 systemic and 12 borderline cases) for the period 1996 to 2010. We account for two types of interventions in the containment phase (blanket guarantees and liquidity support), and two in the resolution phase (recapitalizations and nationalizations).

> 3  Policymakers share this concern. The former Fed Chairman Paul Volker argues that bailouts constitute an “unintended and unanticipated extension of the official safety net” (Testimony, House Financial Services Committee on October 1, 2009). 4  Hakenes and Schnabel (2010) note that the German government was criticized by the European Commission for the competitive effects that may arise from the rescue of Commerzbank.

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