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

Published online by Cambridge University Press:  01 November 2016

Cesar Calderon  and
Klaus Schaeck
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Abstract

We investigate how government interventions such as blanket guarantees, liquidity support, recapitalizations, and nationalizations affect banking competition. These issues are 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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 51 , Issue 4 , August 2016 , pp. 1391 - 1436
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2016 

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