Revisiting the Stabilization Role of Public Banks

Abstract

This paper revisits the stabilization role of public banks and analyzes whether weak public finances may hinder this role. During the global financial crisis (GFC), public banks were widely used to counter the private credit crunch and prop up the economy. Using cross-country bank-level data for 125 advanced and developing economies for 1999–2018, the paper finds public bank lending to be less procyclical than private bank lending on average, particularly during busts. A key result, however, is that in developing economies with high public debt levels, public bank lending has been more procyclical, particularly outside of the GFC period. This finding suggests high public debt can limit the stabilization role of public banks during domestic busts, likely reflecting higher financing costs public banks face and lower subsidies they receive in economies with tighter budget constraints.

The Public‐Sector Cost of Capital: An Empirical Test of Peltzman’s Conjecture*

“…The channel of transmission is through profit smoothing. In a complementary approach using granular bank‐level rich panel data, Cull and Peria (2013); Ture (2020) find that government‐sponsored bank lending is less procyclical than non‐government‐sponsored bank lending, particularly during busts and in countries with more fiscal space (Ture, 2020). These findings suggest that government‐sponsored banks buffer lending against economic cycles, and thus their cash flows are less volatile.…”