The Real Effects of Financial Protectionism

39 Pages Posted: 7 Mar 2019

See all articles by Philipp Schaz

Philipp Schaz

Humboldt University of Berlin

Date Written: February 14, 2019

Abstract

This paper analyzes the effect of government support for banks, such as recapitalizations on financial integration and firm outcomes. Using data on European syndicated lending, results show that bailout banks increase their home bias in lending by 24.6% more than non-bailout banks. In turn, discriminated foreign firms can only imperfectly substitute this fall in lending by switching banks or issuing corporate bonds. Thus, the negative loan supply effect translates into lower sales and employment growth for foreign firms. In addition, government support distorts credit allocation in the home market by shifting lending to larger, safer and less innovative firms. Moreover, I document that politicians gain influence over banks by transferring control rights to the government as part of the support scheme. These results suggest that locating bank resolution within the European Banking Union at the national level discourages international economic activity, distorts credit towards less productive firms and harms growth.

Keywords: Bank Bailouts, Financial Protectionism, Cross-border Bank Flows, Syndicated Loan Market, Real Effects, European Banking Union

JEL Classification: F21, F36, G21, G30, O16

Suggested Citation

Schaz, Philipp, The Real Effects of Financial Protectionism (February 14, 2019). Available at SSRN: https://ssrn.com/abstract=3333981 or http://dx.doi.org/10.2139/ssrn.3333981

Philipp Schaz (Contact Author)

Humboldt University of Berlin ( email )

Unter den Linden 6
Berlin, AK Berlin 10099
Germany

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

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