The Effects of Government Interventions in the Financial Sector on Banking Competition and the Evolution of Zombie Banks

Abstract

General rightsThis document is made available in accordance with publisher policies. Please cite only the published version using the reference above. Full terms of use are available: http://www.bristol.ac.uk/pure/about/ebr-terms We investigate how government interventions such as blanket guarantees, liquidity support, recapitalizations, and nationalizations affect banking competition. This issue is critical for stability, access to finance, and economic growth. Exploiting cross-country and cross-time variation in the timing of interventions and accounting for their nonrandomness, we document that liquidity support, recapitalizations, and nationalizations trigger large increases in competition. We also find some more nuanced evidence that zombie banks' market shares in crisis countries evolve together with interventions. A higher frequency of interventions coincides with greater zombie bank presence, and increases in competition are larger when zombie banks occupy bigger market shares.

Bank competition, stability, and intervention quality

“…It sends strong signals to all banks and makes them anticipate future aid, distorting their incentives with potential implications for competition (Calderon & Schaeck, 2016). It sends strong signals to all banks and makes them anticipate future aid, distorting their incentives with potential implications for competition (Calderon & Schaeck, 2016).…”

“…We use the regulatory quality index published by the Word Bank (Worldwide Governance Indicators), following Kaufmann et al (2011) and Calderon and Schaeck (2016) to measure government intervention quality. We use the regulatory quality index published by the Word Bank (Worldwide Governance Indicators), following Kaufmann et al (2011) and Calderon and Schaeck (2016) to measure government intervention quality.…”

“…On the other hand, because competition pulls interest rates down, deterring moral hazard and adverse selection behaviour among borrowers, and decreasing loans, it may lead to greater stability (Fu, Lin, & Molyneux, 2014;Noman, Gee, & Isa, 2017). Intervention policies against competition increase banking fragility: Weak banks do not exit the market and evolve as unviable banks, which may crowd out their healthy competitors (Beck, Demirgüç-Kunt, & Levine, 2006;Calderon & Schaeck, 2016). The second determinant, government intervention, has implications for bank competition (Acharya & Yorulmazer, 2007;Ahamed & Mallick, 2017) and for the competition-stability relation.…”

The effectiveness of TARP-CPP on the US banking industry: A new copula-based approach

“…In this regards, recent papers (e.g. Gropp, Hakenes, & Schnabel, 2011, Black & Hazelwood, 2013, Calderon & Schaeck, 2016 have shown that bailouts can increase the moral hazard behaviour of banks when monitoring incentives are distorted. In addition, Berger, Bouwman, Kick, and Schaeck (2014) demonstrate that bailouts can lead to inappropriate loan pricing and the granting of loans to riskier borrowers.…”

“…These events led to a proliferation of new studies on the determinants and the consequences of bank failures and bailouts (e.g. Demyanyk & Hasan, 2010, Dam & Koetter, 2012, Bayazitova & Shivdasani, 2012, Cole & White, 2012, Berger & Bouwman, 2013, Calderon & Schaeck, 2016. While the availability of government safety nets and rapid intervention policies can have beneficial effects in resolving crises, their use is not free from criticism.…”