Bank Bailouts, Competition, and the Disparate Effects for Borrower and Depositor Welfare
This paper investigates how government interventions into banking systems such as blanket guarantees, liquidity support, recapitalizations, and nationalizations affect banking competition. This debate is important because the pricing of banking pro...
| Main Authors: | , |
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, D.C.
2013
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2013/04/17580914/bank-bailouts-competition-disparate-effects-borrower-depositor-welfare http://hdl.handle.net/10986/14449 |
| Summary: | This paper investigates how government
interventions into banking systems such as blanket
guarantees, liquidity support, recapitalizations, and
nationalizations affect banking competition. This debate is
important because the pricing of banking products has
implications for borrower and depositor welfare. Exploiting
data for 124 countries that witnessed different policy
responses to 41 banking crises, and using
difference-in-difference estimations, the paper presents the
following key results: (i) Government interventions reduce
Lerner indices and net interest margins. This effect is
robust to a battery of falsification and placebo tests, and
the competitive response also cannot be explained by
alternative forces. The competition-increasing effect on
Lerner indices and net interest margins is also confirmed
once the non-random assignment of interventions is accounted
for using instrumental variable techniques that exploit
exogenous variation in the electoral cycle and in the design
of the regulatory architecture across countries. (ii)
Consistent with theoretical predictions, the
competition-increasing effect of government interventions is
greater in more concentrated and less contestable banking
sectors, but the effects are mitigated in more transparent
banking systems. (iii) The competitive effects are
economically substantial, remain in place for at least 5
years, and the interventions also coincide with an increase
in zombie banks. The results therefore offer direct evidence
of the mechanism by which government interventions
contribute to banks' risk-shifting behavior as reported
in recent studies on bank level runs via competition. (iv)
Government interventions disparately affect bank
customers' welfare. While liquidity support,
recapitalizations, and nationalizations improve borrower
welfare by reducing loan rates, deposit rates decline. The
empirical setup allows quantifying these disparate effects. |
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