Elections, Political Competition and Bank Failure

Liu, Wai‐Man; Ngo, Phong T. H.

doi:10.2139/ssrn.2189149

Cited by 26 publications

(29 citation statements)

References 44 publications

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“…In addition, a number of papers provide evidence that politicians in power routinely delay bad news about problems in the banking sector, both in developing and in industrialized countries (e.g., Brown and Dinc, 2005;Imai, 2009;Liu and Ngo, 2014). Our paper adds to this literature by demonstrating that government refinancing needs in times of fiscal stress affect domestic banks' choices to hold domestic sovereign debt.…”

Section: Ecb Working Paper 1937 July 2016mentioning

confidence: 69%

The Invisible Hand of the Government: 'Moral Suasion' During the European Sovereign Debt Crisis

2016

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract Using proprietary data on banks' monthly securities holdings, we find that during the European sovereign debt crisis, domestic banks in fiscally stressed countries were considerably more likely than foreign banks to increase their holdings of domestic sovereign bonds in months with relatively high domestic sovereign bond issuance. This effect is stronger for state-owned banks and for banks with low initial holdings of domestic sovereign bonds, and it is not fuelled by Central Bank liquidity provision. Our results point to a "moral suasion" mechanism, and cannot be explained by concurrent risk-shifting, carry-trading, regulatory compliance, or shocks to investment opportunities. Terms of use: Documents in EconStor may Non-technical summaryBanks' rapidly increasing balance sheet exposures to domestic sovereign debt during the euro area sovereign debt crisis led both academics and policy makers to speculate that this development was at least partly the result of domestic sovereigns putting pressure on some banks to extend material support to the government, a mechanism known as "moral suasion".However, despite speculations about the prevalence of this mechanism running rife, comprehensive and direct empirical evidence unequivocally showing that banks have acted at the government's request is missing. In this paper employ a novel identification strategy to tease out if and when governments sway banks to increase their holdings of domestic sovereign bonds over and above their needs.Our identification strategy rests on three facts. First, the main determinant of newly issued sovereign debt is the amount of maturing sovereign debt which the government needs to roll over. Second, the amount of retiring government debt is pre-determined, because it is the outcome of choices typically made years ago by previous governments. As a result, the government's need today to refinance maturing debt fluctuates wildly month-on-month. Third, domestic banks are more likely to be "morally swayed" than foreign banks, through explicit and implicit threats to those banks that decide not to cooperate.Employing a unique proprietary dataset which contains detailed end-of-month information on net flows and holdings of domestic sovereign debt securities for a large sample of domestic and foreign banks active in stressed euro zone countries, we assess the differences in net purchases of domestic sovereign debt between high-need and low-need months, for domestic banks relative ...

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Section: Ecb Working Paper 1937 July 2016mentioning

confidence: 69%

The Invisible Hand of the Government: 'Moral Suasion' During the European Sovereign Debt Crisis

2016

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“…This paper joins several recent studies that examine the economic impact of political uncertainty using gubernatorial election data. Liu, Phong, and Ngo (2014) document that bank failure is lower during gubernatorial elections in the United States. Gao and Qi (2013) find that municipal bond yields increase, and Jens (2016) shows that corporate investment is lower during such times.…”

Section: Introductionmentioning

confidence: 99%

Political Uncertainty and IPO Activity: Evidence from U.S. Gubernatorial Elections

Çolak¹,

Durnev²,

Qian³

2017

J. Financ. Quant. Anal.

356

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We analyze initial public offering (IPO) activity under political uncertainty surrounding gubernatorial elections in the United States. There are fewer IPOs originating from a state when it is scheduled to have an election. To establish identification, we develop a neighboring-states method that uses bordering states without elections as a control group. The dampening effect of elections on IPO activity is stronger for firms with more concentrated businesses in their home states, firms that are more dependent on government contracts (particularly state contracts), and harder-to-value firms. This dampening effect is related to lower IPO offer prices (hence, higher costs of capital) during election years.

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“…3 More surprisingly, Liu & Ngo (2014) find that US banks failures are less likely in a year before a gubernatorial election.…”

Section: Endnotesmentioning

confidence: 98%

Political Borders and Bank Lending in Post-Crisis America*

Chavaz

Rose²

2018

Review of Finance

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We study political influences on private banks receiving government funds. Using spatial discontinuities associated with congressional district borders, we show that recipient banks of the 2008 Troubled Asset Relief Program (TARP) program increased mortgage and small business lending by 23–60% more in census tracts located just inside their home-representative’s district than just outside; the effect also shows up in higher loan acceptance rates, and mortgages more likely to be impaired or in default. The effect is stronger when the representative voted for TARP, is politically powerful, connected to the financial industry, and when the bank is important in the district. These findings suggest that obtaining public funds subjects firms to political influences, which affects the quantity and quality of corporate investment because of political considerations.

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Elections, Political Competition and Bank Failure

Cited by 26 publications

References 44 publications

The Invisible Hand of the Government: 'Moral Suasion' During the European Sovereign Debt Crisis

The Invisible Hand of the Government: 'Moral Suasion' During the European Sovereign Debt Crisis

Political Uncertainty and IPO Activity: Evidence from U.S. Gubernatorial Elections

Political Borders and Bank Lending in Post-Crisis America*

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