To Give or Not to Give? Government Guarantees, Bank Ownership & Banking Stability

45 Pages Posted: 25 Jul 2015 Last revised: 17 Sep 2015

See all articles by Sumit Agarwal

Sumit Agarwal

National University of Singapore

Dulani Jayasuriya

University of Auckland

Date Written: September 15, 2015

Abstract

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

Suggested Citation

Agarwal, Sumit and Jayasuriya Daluwathumullagamge, Dulani, To Give or Not to Give? Government Guarantees, Bank Ownership & Banking Stability (September 15, 2015). Available at SSRN: https://ssrn.com/abstract=2635398 or http://dx.doi.org/10.2139/ssrn.2635398

Sumit Agarwal

National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 117592
Singapore
8118 9025 (Phone)

HOME PAGE: http://www.ushakrisna.com

Dulani Jayasuriya Daluwathumullagamge (Contact Author)

University of Auckland ( email )

Private Bag 92019
Auckland Mail Centre
Auckland, 1142
New Zealand

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