To Give or Not to Give? Government Guarantees, Bank Ownership & Banking Stability
45 Pages Posted: 25 Jul 2015 Last revised: 17 Sep 2015
Date Written: September 15, 2015
Using a unique dataset of 2236 banks from 78 countries, we examine the effects of government guarantees on banking stability of private, state and foreign owned banks. We find that the moral hazard effect provokes higher risk taking for local private (protected) banks relative to foreign (competitor) banks. Long & short term government guarantees are associated with a risk increase by 22% and 26%, lending contraction by 25% and 16% for private banks relative to foreign banks respectively. Long term guarantees result in increased profitability and decreased loan loss provisioning for state banks relative to foreign banks. We explain our results based on the effects of financial fragmentation, debt servicing pressures, loan forbearance and precautionary savings.
Keywords: Bank Stability, Government guarantees, Bank Ownership, Market Discipline
JEL Classification: G21, G28, G32, H44
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