To test if safety nets create moral hazard in the banking industry, we develop a simultaneous structural two-equations model that specifies the probability of a bailout and banks' risk taking.We identify the effect of expected bailout probabilities on risk taking using exclusion restrictions...

Recent developments on international financial markets have called the benefits of bank globalization into question. Large, internationally active banks have acquired substantial market power, and international activities have not necessarily made banks less risky. Yet, surprisingly little is...