Abstract
In this paper, we develop a contingent claim model to examine the optimal bank interest margin, i.e., the spread between the domestic loan rate and the deposit market rate of an international bank in distress. The framework is used to evaluate the cross-border lending efficiency for a bank that participates in a government capital injection program, a government intervention used in response to the 2008 financial crisis. This paper suggests that government capital injection is an appropriate way to recapitalize the distressed bank, enhancing the bank interest margin and survival probability. Nevertheless, the government capital injection lacks efficiency when the bank’s cross-border lending is high. Stringent capital regulation, suggested to prevent future crises by literature, leads to superior lending efficiency when the government capital injection is low.
Highlights
The 2007/2008 global financial crisis raises fundamental issues about the banking strategies of international loan portfolio diversification, especially from the standard of return/risk efficiency.1Figure 1 reports the overall cross-border claims on banks of BIS (Bank of International Settlements) reporting banks from 1998 to 2018
We show that government capital injection produces an increase in bank interest margin and a decrease in bank equity risk
Bayazitova and Shivdasani (2011), we suggest that a government capital injection program can stabilize a distressed bank when the bank does not take an active part in cross-border lending
Summary
The 2007/2008 global financial crisis raises fundamental issues about the banking strategies of international loan portfolio diversification, especially from the standard of return/risk efficiency.. Comprehending whether higher cross‐border loangain, portfolio how these effects differ depending on on the the distressed bank’s margin, participation in a government capital diversification has significant effects bank interest the bank equity risk, and the injection program are important for the regulatory authority to achieve a desired level of banking diversification efficiency gain, and how these effects differ depending on the distressed bank’s stability. From a normative standpoint, our results sound a note to the adaption of government capital injection mechanism that reduces efficiency but contributes to stability, while the adaption of capital regulation mechanism after a financial crisis that increases efficiency and stability in the context of cross-border loan portfolio diversification.
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