Government intervention and banking sector stability - international evidence

Abstract

This thesis examines three distinct but related issues concerning government intervention in the banking sector: (1) the level of government ownership in relation to bank stability, (2) the association between regulatory restrictions and bank stability, and (3) the impact of the timing of government intervention on the duration and costs of systemic banking crises. While the first two research issues remain widely debated and controversial among policymakers and academics, the third issue remains unexplored in the literature. Two samples are used to examine these matters. Government ownership and regulatory restrictions in relation to bank stability are investigated by applying the generalized method of moments (GMM) procedure on a sample of 2,898 commercial banks from 81 countries over the period 1995–2011. The timing of government intervention associated with the crisis duration and crisis costs is investigated using survival analysis and ordinary least squares (OLS) regression on a smaller sample of 65 systemic banking crises in 56 countries during 1980–2012. This thesis shows that the level of government ownership is associated with bank stability. This relation, however, differs among country groups. While it is negatively associated in developing countries, the association is positive in developed countries. Furthermore, a higher quality of regulatory governance and control of corruption appeared to reduce the negative association in developing countries while strengthening the positive effect in developed ones. In contrast, political influence during election years exacerbates the negative impact of government ownership on bank stability in developing countries as well as reducing the positive effect in developed ones. In terms of regulatory restrictions, each type of restriction was found to impact differently impact on bank stability. Interest rate and entry restrictions are positively associated with bank stability in developing countries but not developed countries, whereas credit controls are negatively related in both developed and developing countries. In regard to the timing of government intervention and the crisis duration and costs, early intervention is associated with shorter crisis duration and less output losses but does not impact on the crisis fiscal costs. While most relevant studies focus on the difference in bank stability between government-owned and privately-owned banks, this thesis contributes to the bank government ownership literature by providing new evidence for the relation between the actual level of government ownership and bank stability. The difference found between developed and developing countries further adds to the literature by showing that the same level of government ownership has a different effect on bank stability depending on the quality of regulatory governance, the control of corruption and political influence. This thesis also extends the literature of bank regulation by providing new evidence of the relation between different dimensions of regulatory restrictions, interest rate controls, credit controls and sector entry restrictions, in relation to bank stability. Finally, the thesis contributes to the crisis management literature by providing new evidence of the association between the timing of intervention and the crisis duration and costs. These findings should be of interest to academics, government authorities, policy makers, regulators, central bankers, taxpayers and other bank stakeholders.