Calderon, CesarSchaeck, Klaus2013-07-102013-07-102013-04https://hdl.handle.net/10986/14449This 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.en-USCC BY 3.0 IGOACCESS TO BANKINGACCESS TO BANKING SERVICESACCESS TO FINANCEACCESS TO FINANCIAL SERVICESACCOUNTINGASSET MANAGEMENTASSET MANAGEMENT COMPANIESBAILOUTBALANCE SHEETBALANCE SHEETSBALANCE-SHEETBANK ACCOUNTSBANK ASSETSBANK BAILOUTSBANK BRANCHBANK BRANCHESBANK COMPETITIONBANK CONSOLIDATIONBANK CREDITBANK CUSTOMERSBANK DEBTBANK FAILURESBANK LENDINGBANK LIQUIDITYBANK POLICYBANK PROFITABILITYBANK RECAPITALIZATIONBANK REGULATIONBANK SPREADSBANKING CRISESBANKING CRISISBANKING MARKETBANKING MARKETSBANKING PANICSBANKING SECTORBANKING SECTORSBANKING SERVICESBANKING SYSTEMBANKING SYSTEM ASSETSBANKING SYSTEMSBANKSBARRIER TO ENTRYBORROWERBRANCH DENSITYCAPITAL ACCOUNTCAPITAL INJECTIONSCAPITALIZATIONCENTRAL BANKCHECKSCOMMERCIAL LOANSCOMPETITOR BANKSCONSOLIDATIONCONVERSIONSCORE DEPOSITSCORPORATE BORROWERSCREDIT AVAILABILITYCREDIT MARKETCREDIT PROVISIONCREDITORSCRISIS COUNTRIESCURRENCY CRISESCURRENCY CRISISDEBTDEMAND FOR CREDITDEPENDENTDEPOSITDEPOSIT INSURANCEDEPOSIT INSURANCE COVERAGEDEPOSITORDEPOSITORSDEPOSITSDISCLOSURE REQUIREMENTSDISTRESSED BANKSDOMESTIC BANKSDOMESTIC CREDITDUMMY VARIABLEDUMMY VARIABLESECONOMIC DEVELOPMENTECONOMICSEMERGENCY LENDINGEMERGING MARKETEMERGING MARKET COUNTRYEMERGING MARKETSENTREPRENEURSHIPENTRY BARRIERSEQUITY CAPITALEQUITY PARTICIPATIONEQUITY STAKEFAIR VALUEFEDERAL RESERVEFEDERAL RESERVE BANKFEDERAL RESERVE BANK OF NEW YORKFINANCIAL CRISISFINANCIAL DEVELOPMENTFINANCIAL DISTRESSFINANCIAL FRAGILITYFINANCIAL INTERMEDIATIONFINANCIAL MARKETSFINANCIAL SERVICESFINANCIAL STABILITYFINANCIAL STUDIESFINANCIAL SUPPORTFINANCIAL SYSTEMFINANCIAL SYSTEM DEVELOPMENTFINANCIAL SYSTEM DEVELOPMENTSFINANCIAL SYSTEMSFOREIGN BANKFOREIGN BANK PARTICIPATIONFOREIGN BANK PENETRATIONFOREIGN BANKSFOREIGN CREDITORSFOREIGN CURRENCYFOREIGN CURRENCY LOANSFUTURE BAILOUTSGLOBAL BANKINGGOVERNMENT AIDGOVERNMENT EXPENDITUREGOVERNMENT INTERVENTIONGOVERNMENT INTERVENTIONSGOVERNMENT INVESTMENTGOVERNMENT OWNERSHIPGOVERNMENT SUPPORTHELD TO MATURITY SECURITIESINCOME CATEGORIESINCOME CATEGORYINCOME GROUPINDIVIDUAL BANKSINFLATIONINFORMATION ASYMMETRIESINSTRUMENTINTANGIBLEINTANGIBLE ASSETSINTANGIBLESINTEREST INCOMEINTEREST RATEINTEREST RATE RISKINTERNATIONAL BANKLARGE BANKLARGE BANKSLEGAL REQUIREMENTSLENDERLENDER OF LAST RESORTLIMITED LIABILITYLIQUIDATIONSLIQUIDITY SUPPORTLOANLOAN CATEGORIESLOAN GUARANTEESLOAN MARKETLOAN MARKETSLOAN RATELOAN RATESLOAN VOLUMESMACROECONOMIC STABILITYMACROECONOMICSMARKET CAPITALIZATIONMARKET COMPETITIONMARKET CONCENTRATIONMARKET CONDITIONSMARKET DISCIPLINEMARKET ECONOMIESMARKET PARTICIPANTSMARKET SHAREMARKET SHARESMARKET STRUCTUREMARKET VALUESMATURITYMATURITY MISMATCHMERGERSMONETARY FUNDMONETARY POLICYMONEY MARKETMONEY MARKET RATEMONEY MARKET RATESMORAL HAZARDMORTGAGE LOANSNATIONALIZED BANKSNET INTEREST MARGINNET WORTHNONPERFORMING LOANSNUMBER OF BANKPAYMENT SYSTEMSPOLICY RESPONSEPOLICY RESPONSESPOLITICAL ECONOMYPORTFOLIOPORTFOLIOSPOSITIVE COEFFICIENTPRINCIPAL-AGENT PROBLEMSPROFITABILITYPROVISION OF CREDITPUBLIC FUNDSRATE OF RETURNREAL ESTATERECAPITALIZATIONRECAPITALIZATIONSREGULATORY FORBEARANCEREGULATORY FRAMEWORKSRESIDENTIAL MORTGAGERISK TAKINGRISKY ASSETSRISKY BORROWERSSAFETY NETSAVINGSSECURITIESSMALL BANKSSOLVENCYSTOCK RETURNSSTRUCTURAL ADJUSTMENTSUPERVISION OF BANKSSYSTEMIC BANKING CRISESSYSTEMIC CRISESSYSTEMIC CRISISSYSTEMIC RISKTAXTAX POLICIESTERMS OF LOANTRANSPARENCYTRANSPARENT SYSTEMWorld Bank10.1596/1813-9450-6410