Government Interventions - Restoring or Destroying Financial Stability in the Long-Run?

Preprint
Publisher Website
Google Scholar
Abstract
The systemic banking crises placed enormous pressure on national governments to intervene. However, these actions are justified if they contribute to economic recovery without subsequently increasing significant risk in the banking sector. Using a novel bank-level database, we examine whether and which government intervention measures among those commonly used enhance the credit supply in a country’s banking sector and restore banking-sector stability after a crisis. We document that in general, government interventions have a negative impact on banking sector recovery, increasing its risk significantly. In particular, our evidence shows that government involvement in the banking sector exerts a negative effect on credit supply, reducing its availability to borrowers. Nationalizations and asset management companies (AMCs) contribute most to these effects. Our evidence strongly encourages the regulatory authorities to rely on market mechanisms for resolving systemic banking crises. commitment.

This publication has 43 references indexed in Scilit: