Government Guarantees and Bank Liquidity Creation Around the World

55 Pages Posted: 22 Jan 2021 Last revised: 3 Feb 2021

See all articles by Allen N. Berger

Allen N. Berger

University of South Carolina - Darla Moore School of Business; Wharton Financial Institutions Center; European Banking Center

Xinming Li

University of South Carolina, Darla Moore School of Business, Department of Finance

Herman Saheruddin

University of South Carolina - Department of Finance

Daxuan Zhao

Renmin University of China - School of Business

Date Written: November 12, 2020

Abstract

Governments provide guarantees to banks, such as deposit insurance, often increasing them during financial crises. While risk effects are well researched, impacts on bank output remain largely unexplored. We investigate bank output effects using data from 75 countries on bank liquidity creation, a comprehensive bank output measure. We address the reverse-causality identification challenge by examining effects of home country guarantees on liquidity creation by subsidiary banks in foreign host nations, and tackle omitted-variables concerns by specifying host country × year fixed effects. Our striking findings suggest that home-country guarantees increase decrease subsidiary bank liquidity creation by as much as 15%.

Keywords: Banks, Government Guarantees, Liquidity Creation

JEL Classification: G01, G18, G21, G28

Suggested Citation

Berger, Allen N. and Li, Xinming and Saheruddin, Herman and Zhao, Daxuan, Government Guarantees and Bank Liquidity Creation Around the World (November 12, 2020). Available at SSRN: https://ssrn.com/abstract=3729115 or http://dx.doi.org/10.2139/ssrn.3729115

Allen N. Berger

University of South Carolina - Darla Moore School of Business ( email )

1705 College St
Francis M. Hipp Building
Columbia, SC 29208
United States
803-576-8440 (Phone)
803-777-6876 (Fax)

Wharton Financial Institutions Center

Philadelphia, PA 19104-6367
United States

European Banking Center

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Xinming Li

University of South Carolina, Darla Moore School of Business, Department of Finance ( email )

1014 Greene Street
Columbia, SC 29208
United States

Herman Saheruddin

University of South Carolina - Department of Finance ( email )

1014 Greene Street
Columbia, SC 29208
United States

Daxuan Zhao (Contact Author)

Renmin University of China - School of Business ( email )

Beijing
China

HOME PAGE: http://daxuanzhao.weebly.com/

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