Beyond Government Support: The Role of Efficient Banks in Reducing Volatility and Expediting Economic Recovery During the COVID-19 Crisis

20 Pages Posted: 11 Jan 2021 Last revised: 21 Feb 2023

See all articles by Ruchith Dissanayake

Ruchith Dissanayake

Queensland University of Technology - School of Economics and Finance

Yanhui Wu

Queensland University of Technology - School of Economics and Finance; Financial Research Network (FIRN)

Date Written: February 18, 2022

Abstract

Amid an economic crisis, banking institutions that operate efficiently can provide liquidity to the private sector at a lower intermediary cost, thereby enhancing the financial slack for credit constrained corporations. We hypothesize that efficient banks help reduce market turmoil during an economic crisis and facilitate post-crisis output growth. In this study, we use the Covid-19 pandemic as a quasi-natural setting to test our hypotheses. Our empirical findings demonstrate that countries with efficient banking systems experienced significantly lower market volatility than their counterparts with inefficient banking systems during the pandemic. Moreover, countries with efficient banking institutions also exhibited considerably higher post-crisis output growth prospects based on professional analyst forecasts. Our results underscore the previously overlooked role of banking institutions efficiency in mitigating volatility during an economic crisis and expediting the post-crisis recovery.

Keywords: volatility, Covid, pandemic, financial institutions efficiency, banking efficiency, economic recovery

JEL Classification: G01, G21, G28

Suggested Citation

Dissanayake, Ruchith and Wu, Yanhui, Beyond Government Support: The Role of Efficient Banks in Reducing Volatility and Expediting Economic Recovery During the COVID-19 Crisis (February 18, 2022). Available at SSRN: https://ssrn.com/abstract=3759421 or http://dx.doi.org/10.2139/ssrn.3759421

Ruchith Dissanayake (Contact Author)

Queensland University of Technology - School of Economics and Finance ( email )

GPO Box 2434
2 George Street
Brisbane, Queensland 4001
Australia

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

Yanhui Wu

Queensland University of Technology - School of Economics and Finance ( email )

GPO Box 2434
2 George Street
Brisbane, Queensland 4001
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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