This study empirically analyzes the effect of long-term and short-term government interventions on the stability of private, state-owned and foreign banks with concentrated (blockholder) ownership. Little attention is paid in the previous literature to research on the effect of government interventions on bank stability, especially for banks with concentrated ownership. However, our study provides direct evidence using clear measures of long-term and short-term ex-post government interventions.
Long and short term government interventions lead to an increase in capital ratios by 1.7% and 8.39% against 10%. Government interventions lead to higher charter values for protected banks due to lower refinancing costs. Previous empirical literature has mainly focused on the effect of government interventions on the protected banks' risk taking.
This study differentiates the effects of government interventions based on their time span into long-term and short-term. We take into account state interventions in the form of liquidity support, asset purchases, recapitalization, restructuring and general interventions in the liabilities of banks at the bank level. This classification allows us to subsequently determine the long-term and short-term effects of state interventions on commercial banks.
Empirical Methodology
Our ownership variables are calculated as follows: Foreign_Owned is a dummy variable equal to 1 if the main shareholder is a foreign company and is excluded from the regression. Ownership concentration is the percentage of shares owned by the primary shareholder (more than 20% of the shares)15. Secondary ownership concentration is the percentage of shares held by secondary shareholders (ie when the percentage of ownership is less than the 20% cut-off).
Short-term intervention is a bank-level dummy variable that equals 1 if the government has intervened for less than a year to support that specific bank in terms of liquidity support, bank capitalization, general guarantees and restructuring, and is 0 if a bank is foreign-owned. Long-term interventions is a bank-level dummy variable that equals 1 if the government has intervened for more than one year to support that specific bank in terms of liquidity support, bank capitalization, restructuring, general guarantees, nationalizations and is 0 if a bank is foreign-owned. In addition, the use of bank financing is borne by the costs considered as the total operating costs, scaled by the total profit assets.
Empirical Results 1 Summary Statistics
- Government Interventions, Concentrated Ownership & Stability
- Government Interventions, Concentrated Ownership & Lending Quality
- Government Interventions, Concentrated Ownership, Sources & Costs of Bank Funding
- Government Interventions, Concentrated Ownership & Non Linearity
- Matched Sample Analysis
- Instrumental Variable Analysis
- Falsification Analysis
It is understood that short-term government interventions result in a contraction of credit from state-owned and private banks. In panel B, given short-term government interventions, banks with higher private ownership concentration decrease lending by 0.45% at 1% significance in regression 1. For banks with high private ownership concentration, short-term government interventions result in a decrease in lending by about 0.79% to 0.88% with 1% significance.
According to our results, given short-term government intervention and high concentrations of government ownership, state-owned banks report higher loan loss provisions. Short-term government interventions result in a 6.55% increase in loan loss provisions for state-owned banks. In panel C, given short-term government interventions for high concentration of government ownership, equity increases by 8.39% at 10% significance.
Given long- and short-term government interventions, a higher concentration of private and state ownership leads to a contraction of the liability side of the balance sheet. Long-term interventions lead to lower short-term funding of 0.33% at 10% significance for banks with a high concentration of state ownership. For banks with a high concentration of private ownership, short-term financing is reduced by 0.48% at 1% significance.
In Table A.7, given short-term government interventions, the cost to private banks increases by 15% at 5% significance. Given short-term government interventions for banks with higher private concentration deposits reduced by 0.95% at 5% significance. Given short-term government interventions, the short-term financing of private banks is reduced by 1.36% at 1% significance.
However, for banks with high concentration of private ownership, long-term liabilities decrease by 1.36% to 1.39% with a significance of 1% given short-term interventions. Given short-term government interventions, the equity levels of private and state-owned banks deteriorate by 0.78% and 0.92% at 1% significance.
Robustness
This measure of tangible capital is more conservative than relying on measures of statutory capital. In the last step, we calculate three measures of the presence of zombie banks, i.e. for those banks for which the dummy for negative tangible capital takes the value of one: the number of zombie banks relative to the total number of banks, and we also calculate the market shares of zombie banks for total lending and total deposits for each country per year. Therefore, the percentage of zombie banks in a given year is a measure of the stability of the banking system in that country.
We predict that a higher proportion of zombie banks in the banking sector would on average increase the probability of government interventions, signaling a weak banking sector. In addition, we also show Shea's partial R2, which provides information about the correlation between the excluded instruments and the endogenous variables, and report the F-Test for the joint significance of the instruments. To test the orthogonality of the identifying instruments, we report the J-Hansen statistic for the null that the instruments are uncorrelated with the key ratios for that particular bank.
Finally, we use a crude test to determine that the causal effect of the interventions can only be observed during the periods when the intervention is implemented. We create placebo treatments by pretending that long-term and short-term government interventions occurred two years before the actual intervention. In this case, the nonsignificant effect of the placebo treatment suggests that the significant associations discovered in the previous section on empirical results are causally related to government interventions.
Sixth, we also implement system GMM models as specified in the empirical methodology section as an alternative to a panel fixed effects model. We add more governance indicators and many more interaction terms between GDP and ownership, government intervention, etc. Furthermore, we use the cut-off levels of 10% and 15% when defining ownership types, and our results hold for the 10% cut-off and for the mostly for 15% cut-off.
In addition, we use control variables specially related to bank competition, bank concentration to account for business differences such as the market share of the top 3 banks and the ratio of net non-interest income to net operating income. Finally, as a simple test of endogeneity, we run all our fixed effects panel regressions without the lags of the dependent variable and our results or the significance of the coefficients mostly do not differ.
Conclusion
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Troost, (2009), Monetary Intervention Mitigated Banking Panics During the Great Depression: Quasi-Experimental Evidence from a Federal Reserve District Boundary Journal of Political Economy. Windmeijer, F., (2005), A finite sample correction for the variance of linear efficient two-stage GMM estimators, Journal of Econometrics 126, 25-51. Short-term intervention is a bank-level dummy variable equal to 1 if the government intervened for less than a year to support the bank in question in terms of liquidity support, bank capitalization, general guarantees, restructuring and is 0 if a bank is foreign-owned.
Long-term interventions is a dummy variable at the bank level, equal to 1 if the government intervened for more than one year to support a particular bank in terms of liquidity support, bank capitalization, restructuring, general guarantees, nationalizations, and is 0 if the bank foreign owned. . Short-term intervention is a bank-level dummy variable equal to 1 if the government has intervened for less than a year to support that particular bank in terms of liquidity support, bank capitalization, general guarantees, restructuring, and is 0 if the bank is in foreign property. . Foreign_owned is a dummy variable equal to 1 if the primary shareholder is a foreign firm and is excluded from the regression.
Short-term intervention is a bank-level dummy variable equal to 1 if the government has intervened for less than a year to support that particular bank in terms of liquidity support, bank capitalization, general guarantees, restructuring, and is 0 if the bank is in foreign property. Long-term interventions are a dummy variable at the bank level, equal to 1 if the government has intervened for more than one year to support a particular bank in terms of liquidity support, bank capitalization, restructuring, general guarantees, nationalizations, and is 0 if the bank foreign. owned. Short-term intervention is a bank-level dummy variable e that is equal to 1 if the government has intervened for less than a year to support a given bank in terms of liquidity support, bank capitalization, general guarantees, restructuring, and is 0 if the bank is in foreign property.
Long-term interventions is a bank-level dummy variable equal to 1 if the government intervened for more than one year to support the bank in question in terms of liquidity support, bank capitalization, restructuring, general guarantees, nationalizations and is 0 if a bank is foreign. owned. Short-term Intervention is a bank-level dummy variable equal to 1 if the government intervened for less than a year to support the bank in question in terms of liquidity support, bank capitalization, general guarantees, restructuring and is 0 if a bank is foreign-owned. Year & Fast Fixed Effects yes yes yes yes yes yes yes yes yes yes yes yes yes yes.
