Government Bailouts Research Articles

Endogenous Risk Exposure and Systemic Instability

Most research on systemic stability assumes an economy where banks are subject to exogenous shocks. However, in practice, banks choose their exposure to risk. I show that there exists a network risk-taking externality: the risk exposure choices made by connected banks are strategically complementary. Banks within financial networks, especially densely connected ones, become endogenously exposed to excessive risks. The theory offers several novel perspectives on policy debates. For instance, it suggests that limiting government bailouts to interbank exposures can effectively reduce endogenous systemic risk. This paper was accepted by Kay Giesecke, finance. Funding: This work was financially supported by the USC Dornsife Institute for New Economic Thinking Fellowship, the Marshall PhD Fellowship, and European Finance Association Doctoral Tutorial Best Paper Prize. Supplemental Material: The online appendix is available at https://doi.org/10.1287/mnsc.2022.01519 .

Assessing the Pandemic Aviation Crisis: Speculative Behavior, Government Bail Outs, and Accommodative Monetary Policy

The COVID-19 pandemic was a health, economic, and financial crisis. The aviation sector was one of the most severely hit. Despite the extensive literature on this, COVID-Finance has been focused on stock returns, neglecting what could be learnt from the spreads of airlines’ credit default swaps (CDSs). This would seem of the utmost importance, given the epicenter of the crisis within the credit market. In this paper, an in-depth analysis of airlines’ CDS spreads is conducted. It is found that they were severely hit, for all airlines studied. However, the results of the PSY test showed that speculative trading led the surge, as explosive roots were found in the spreads of all these aviation firms. The dramatic increase in CDS spreads has contributed to already high borrowing costs for airlines. Our results suggest that aviation bail outs have helped to mitigate spreads’ explosiveness. Monetary policy measures have also limited, albeit indirectly, the funding risk posed by the government bail outs. By the end of March 2021, spreads were no longer explosive, and were approaching, at highly heterogeneous paces, their pre-pandemic values. Notwithstanding, airlines’ stock prices have been notably resistant to recovery.

CEO compensation and bank’s performance following bank-rescue

PurposeThis paper examines the effect of restrictions on executive pay and high CEOs’ compensation on bank performance following the “2008 UK bank rescue policy”.Design/methodology/approachUsing the difference-in-difference estimation technique we assess the relationship between executive compensation and financial performance of rescued banks relative to non-rescued banks over the period 1999–2019.FindingsOur main finding indicates that the relationship between executive compensation and financial performance declines in rescued banks relative to non-rescued banks. Further, we document that performance continues to deteriorate in rescued banks relative to non-rescued banks. Our results are robust to different estimation techniques.Originality/valueThis study contributes to the literature that examines the efficacy of government bailouts during the 2008 crisis. To the best of the author’s knowledge, this study is among the first to examine the long-term implications of bank rescue and pay restrictions on executive compensation and performance post–rescue.

The SOE Premium and Government Support in China's Credit Market

ABSTRACTStudying China's credit market using a structural default model that integrates credit risk, liquidity, and bailout, we document improved price discovery and a deepening divide between state‐owned enterprises (SOEs) and non‐SOEs. Amidst liquidity deterioration, the presence of government bailout helps alleviate the heightened liquidity‐driven default, making SOE bonds more valuable and widening the SOE premium. Meanwhile, the increased importance of government support makes SOEs more sensitive to bailout, while the heightened default risk increases non‐SOEs' sensitivity to credit quality. Examining the real impact, we find severe performance deteriorations of non‐SOEs relative to SOEs, reversing the long‐standing trend of non‐SOEs outperforming SOEs.

Piercing through the haze: Did PPP increase versus decrease bank efficiency?

AbstractWe study profit and cost efficiency effects of the Paycheck Protection Program (PPP) for US banks that disbursed the funds. Using bank‐level data combined with PPP bailout data and instrumental variables and other techniques for identification, our findings suggest that more intense PPP lending boosted bank profit efficiency but decreased cost efficiency. We uncover channels for profit efficiency improvements through higher revenues from core deposits and lending, and a labour‐related channel for the decline in bank cost efficiency from hiring more employees and significantly increasing compensation expenses. Findings are robust to many checks and may have important implications for bank management and future government bailout policy design.

The role of auditing in corporate governance practice in emerging economies: insights from South African state-owned enterprises (SOEs)

PurposeWithin the context of public sector accountability, the purpose of this paper is to examine South African state-owned enterprises (SOEs) auditing practices and how they have contributed to mitigating prevalent corporate governance issues in South African SOEs.Design/methodology/approachThis paper utilised a thematic content analysis of archival documents relating to South African SOEs. Firstly, to assess the extent to which the auditing dimension of the corporate governance codes, applicable to South African SOEs, conforms with best practices. Secondly, to determine the extent to which the audit practices of all the 21 South African SOEs listed in Schedule 2 of the Public Finance Management Act, have implemented the identified best audit practices.FindingsThe findings suggest that South African SOEs appear to have adopted and implemented best audit practices to enhance the quality of their accountability in relation to their corporate governance practices, as contained in their applicable corporate governance frameworks. However, despite the high levels of conformance, the observation that most South African SOEs continue to fail and require government bailouts, appears to suggest that auditing has no bearing on poor SOE performance, and that other corporate governance factors may be at play.Practical implicationsThe discussion and findings in this paper suggest that the auditing practices of South African SOEs are adequate. However, that SOEs in South Africa continue to be loss-making may imply that this has contributed little to mitigating their corporate governance problems. Thus, policymakers and standard setters, including the Institute of Directors South Africa and relevant oversight bodies should pay attention to better developing means by which to curtail fruitless and wasteful expenditures by South African SOEs through improved corporate governance practices.Social implicationsMost SOEs’ mission statements encourage SOEs to be socially responsible and utilise taxpayers’ monies efficiently and effectively without engaging in fruitless and wasteful expenditure. This study is conceived in this light.Originality/valueTo the best of the author’s knowledge, while acknowledging previous studies, this paper is the first to explore this topic in the context of SOEs and in the context of Africa.

Do Retailers Compete Against Informal Firms? A Comparison of the Periods of the Global Crisis and Post-Crisis

This study investigates the transformation of competitive dynamics between formal sector retailers and their informal sector counterparts in Eastern European and Central Asian countries after the 2008-2009 global financial crisis. The absence of extensive government bailouts in these regions intensified the economic repercussions of the crisis. This study used data from the BEEPS II and BEEPS IV (i.e. Business Environment and Enterprise Performance Survey) surveys conducted by the European Bank for Reconstruction and Development and the World Bank with a focus on informal competition in Eastern Europe and Central Asia based on data from owners or top-managers of companies working in this region. To investigate the impact of the global crisis on informal competition for retailers, survey results in 2008 (“crisis period”) were compared with the data in 2013 (“post-crisis period”). Non-parametric tests, specifically the Mann-Whitney-Wilcoxon tests, were used to compare the 2008 and 2013 results. Binary logistic regressions were used to identify factors influencing the perception of competition from the informal sector (Pearson correlation coefficients and assessed Variance Inflation Factors to detect multicollinearity issues). Findings reveal a significant shift post-crisis shift with a reduced proportion of formal sector retailers competing with informal firms. Notably, this effect is statistically insignificant for retailers with sole proprietorships and partnerships and those with internationally recognized quality certifications. Moreover, research highlights a diminished perception of informal competitors as substantial hindrances to retailers’ business operations post-crisis. However, this observation is not statistically significant for retail businesses structured as partnerships. Logistic regression indicates that smaller firms, firms led by a more experienced top manager, and firms with a female top manager are more prone to perceive competition from the informal sector. Furthermore, this study delves into the factors shaping retailers’ perceptions across post-Soviet and other transition countries, revealing differences in the impact of firm size and female ownership. This nuanced investigation contributes depth to the current literature concerning the interconnections between formal and informal retail sectors. It offers a comparative analysis focusing on post-Soviet states and other transitioning nations in Eastern Europe and Central Asia.

Crisis rescue via direct purchase: Evidence from China

During the 2015 stock market crisis, the Chinese government used hundreds of billions of dollars to purchase shares directly in the secondary market. We find that compared with non-rescued firms, rescued firms have significantly lower liquidity after being rescued. Policy uncertainty regarding subsequent interventions better explains the reduction in liquidity than the liquidity dry-up and bad firm signaling hypotheses. Inconsistent with the potential moral hazards associated with government bailouts, the investment policies of rescued firms become more conservative after being rescued. Our evidence warns of the unintended consequences of direct purchase rescue programs.

Biosecurity indemnification and attitudes of United States swine producers towards the prevention of an african swine fever outbreak

Animal disease outbreaks, such as the recent outbreak of African Swine Fever in 2018, are a major concern for stakeholders across the food supply chain due to their potential to disrupt global food security, cause economic losses, and threaten animal welfare. As a result of their transboundary nature, discussions have shifted to preventive measures aimed at protecting livestock while ensuring food security and safety. Emergency assistance has been a critical response option during pandemics. However, this may not be sustainable in the long run because the expectation of government bailout may encourage risk taking behaviours. Our hypothesis is that an indemnity policy that is conditioned on showing biosecurity practices would increase compliance and reduce government expenditure during disease outbreaks. We developed and launched a survey from March to July 2022 targeted at swine producers across the US. From the survey, we examined livestock farmers' attitudes and intentions regarding biosecurity investment and assessed their attitudes towards the purchase of livestock insurance and reporting suspected infected livestock on their farm. We used a partial proportion odds model analysis to examine the model. Our analysis revealed that intention to call a veterinarian, trust in government agencies and risk perception of farmers were instrumental in the willingness to self-invest in biosecurity, purchase livestock insurance, and promptly report infected livestock on their farms. This provides evidence that biosecurity compliance would increase if indemnification was tied to a demonstration of effort to adopt biosecurity practices. We also show that individuals who have been in the industry for a longer period may become complacent and less likely to report outbreaks. Farmers with a higher share of income from their production operations bear a greater risk from their operational income and are more willing to report any suspected infections on their farms. The data suggest that motivating the willingness of farmers to invest in biosecurity while overcoming cost concerns is achievable.

Escaping Zombiness: Does Corporate Governance Have the Elixir of Life?

AbstractThis study investigates the influence of corporate governance on firms’ transition into and out of zombiness. We underscore the beneficial role of external members in the corporate governance structure and long‐tenured chief executive officers (CEOs) in facilitating access to the external resources that firms need to be successful. Using a sample of European listed firms over the period 2008–2018, we adopt a dynamic view of zombiness by identifying shifts in the state from zombie to non‐zombie and vice versa. The results show that board independence is a twofold panacea against zombies, prompting zombie recovery and preventing healthy firms from becoming zombies. By contrast, leadership independence, materialized by separating the CEO and chairperson roles, hampers the recovery of zombies, probably because the cost of lacking unified leadership may exceed the benefits of external dependence minimization. Finally, the results suggest that longer CEO tenure helps healthy firms avoid zombiness. When considering a broader array of stakeholders, government bailout programmes impair zombie recovery, and stronger trade unions help healthy firms escape zombiness. Overall, this study brings a ray of hope to the zombie problem and provides a better appraisal of when supporting zombies might be worthwhile vis‐à‐vis saving promising firms and bringing them back to life.

Data-driven urban waterlogging risk management approach considering efficiency-equity trade-offs and risk mitigation capability evaluation

Because disaster reduction resources are always constrained, risk mitigation measures and policies need to be weighted toward efficiency or equity. Greater efficiency focuses on high-risk areas, and greater equity focuses on identifying additional potential risk areas. To address this efficiency-equity tradeoff decision, a data-driven urban waterlogging risk mitigation capability evaluation and improving framework was proposed for nonprofit operations and government bailouts. First, a novel evaluation index was defined, the F(α,β) score, to consider both precision and recall in the binary classification tasks and to seek an effective efficiency-equity trade-off, after which a two-person, zero-sum matrix game model was developed to calculate the α and β parameters and select the highest valued optimal model. Then, using this model, a risk probability map was generated for Wuhan, China, and data envelopment analysis was used to conduct a risk mitigation capability evaluation and identify the needed policy improvements. It was found that: (1) vulnerability was the primary risk-related factor, followed by adaptability and restorability; (2) more importance should be attached to equity than efficiency when implementing risk reduction capability evaluations, that is, authorities should reduce resource investments in extremely high-risk DEA-inefficient areas and identify a greater number of potential risk areas; (3) there were around 1.55% of extremely high-risk areas, which were mainly concentrated in the Jianghan and Wuchang districts and around 9% of high-risk areas, mainly located in the Hongshan district; and (4) northeastern and southwestern Jianghan district could be a valuable reference for urban waterlogging management and disaster reduction. However, excessive investment in transportation infrastructure and construction in DEA inefficient areas should be appropriately reduced.

Competitive Strategies and Performance of Kenya Airways Limited in Nairobi County, Kenya

Kenya Airways has experienced significant financial losses over a prolonged period, which has led to the requirement of a government bailout and the adoption of a restructuring initiative. Kenya Airways is a major player in the Kenyan aviation sector but has struggled to stay profitable compared to Ethiopian Airlines. Ethiopian Airlines has reported consistent profits for several years, in contrast. Kenya Airways is adopting competitive tactics to improve its performance, but there is a dearth of empirical research on the subject. The objective of this study was to analyse the impact of competitive strategies on the performance of Kenya Airways. The purpose of the study was to examine the impact of differentiation, cost leadership, focus, and innovation on the performance of Kenya Airways Limited. This study was anchored on the following theories: porter’s generic strategies model, dynamic capabilities, resource-based view, strategy-structure-performance, and balanced score card. This study employed a descriptive inquiry approach. The focus group for the study was comprised of a total of 180 staff members of Kenya Airways Limited. The sample size consisted of 124 employees, who were selected using a basic random sampling technique. A semi-structured questionnaire was used to collect primary data. This research assessed the accuracy of the research tool by utilizing the viewpoints of experts through a content validity method. Cronbach's alpha co-efficient was utilized to evaluate the dependability of the research instrument, and a minimum threshold of 0.7 was established. Data was analysed using descriptive statistics using means and standard deviations and inferential statistics. The study made use of correlation analysis and multiple regression analysis to deduce connections among different variables. Differentiation strategy had a positive and significant effect on performance of Kenya Airways of (β= 0.513, p < 0.05). Cost leadership strategy had a positive and significant effect on performance of Kenya Airways of (β=0.458, p < 0.05). Focus strategy had a positive and significant effect on performance of Kenya Airways of (β= 0.540, p < 0.05). Innovation strategy had a positive and significant effect on performance of Kenya Airways of (β=0.651, p < 0.05). The study concluded that differentiation strategy improves the performance of Kenya Airways. Cost leadership strategy helps to improve the performance of Kenya Airways Limited. Focus strategy enhances performance of Kenya Airways Limited and innovation strategy helps to improve performance of Kenya Airways Limited. The study recommended that the company should continue to offer unique features that sets it apart from other airlines. The company should operate efficiently in order to keep costs low.

Subprime Credit Crisis: Cause, Consequence & Response

The 2008 financial crisis had significant impacts on the global economy, leading to the collapse of several large financial institutions, massive government bailouts, and a global recession that lasted for several years. This paper discusses the causes and consequences of the crisis, highlighting the importance of understanding the mechanisms that underlie financial crises and the role that banks and financial institutions play in them. The recent Nobel Prize in Economics, given to the research of systematic risk and the role of banks in financial crises, is also covered in this essay. The crisis was brought on by a number of causes, including loose monetary policy, a housing bubble, and the growing use of sophisticated financial derivatives. The collapse of the subprime mortgage market, the high level of unemployment, and the collapse of many large companies and banks were among the consequences of the crisis. The paper underscores the importance of continued research into the causes and mechanisms of financial crises.

Endogenous money, soft budget constraint and the banking regulation

AbstractA key observation of the endogenous money theory is that banks create deposits (money) by lending. This means that banks apparently face soft budget constraint in responding to demand for credit. However, there are several limiting factors, which can make the banks' money creation somewhat constrained, and can thus harden their budget constraint. Such factors include the need to preserve banks' profitability and the bank regulations (the capital and liquidity requirements). Previous literature on soft budget constraint (SBC) in banking mentioned government bailouts, central banks lender-of-last-resort policies, or the poorly informed depositors who over-finance banks, as reasons for the SBC for banks. Taking the endogenous money theory as a starting point, we use a different approach. We analyze whether the tools that aimed to keep the bank's budget constrain hard are appropriate for this purpose. Our analysis, as well as lessons from several recent bank crisis episodes suggest, that under current banking regulation SBC is an inherent feature of banking.

Causes and Consequences of the 2008 Financial Crisis: A Critical Review

The analysis of the financial crisis is crucial for the growth of the world economy, particularly given the complicated economic environment that COVID-19 is currently experiencing and the war in Ukraine. This paper will discuss the most significant financial crisis that happened in 2008, which was brought on by the financial authorities' shoddy implementation and upkeep of their policies. The collapse of several major banks and financial institutions, high unemployment, government bailouts, the collapse of the real estate market, regulatory reforms, and economic recession were the main consequences of the crisis. It is essential to research and examine the factors that led to the financial crisis of 2008 and its consequences. First, research of this kind enables us to comprehend the underlying causes of the financial catastrophe. Secondly, financial crisis research helps to identify early warning signs of impending crises. Third, the study of financial crises can provide valuable insights into the behavior of financial markets and financial institutions. Fourth, research on financial crises can help inform public policy debates. Finally, research on financial crises can help improve transparency and accountability in the financial sector. Such research can inform public policy, promote transparency and accountability, and help ensure a more stable and sustainable global economy.

The positive impact of increased government bailout on weakening corporate default risk

Abstract Along with the increasing uncertainty of the global economy and the spread of the new crown pneumonia epidemic, the risk challenges to economic development have increased significantly, and the risk of corporate debt defaults has become more pronounced. As an important component of the capital market, the bond market also began to experience credit bond defaults during this period. Since 2021 the global bond market has shown a sharp increase in defaults, with the default rate of non-state enterprise bonds significantly higher than the overall market, and the capital market has also ushered in a period of pain and accelerated credit risk release. Enterprises are on the verge of bankruptcy restructuring and urgently need the government to provide a bailout and stabilize the market. Therefore, this paper uses the financial data of Chinese listed companies from 2016-2021, constructs a relief intensity variable using the equity pledge rate of listed companies before the relief (2021), and empirically analyzes the impact of local government relief and financing cost on the default risk of listed companies using an intensity double difference model. The results of this study show that: (1) local government bailout significantly reduces the default rate of listed companies by 13%; (2) the effect of local government bailout varies significantly depending on whether listed companies have connected transactions with financing platform companies, and the increase of bailout intensity increases the return on assets of listed companies with related transactions with financing platform companies by 9.8%, which laterally reduces the default rate of corporate debt; (3) the cost of financing is an important mechanism by which local government bailouts affect the credit default rate of listed companies, with a regression correlation of 0.75; (4) the above effect is more pronounced in regions with a higher degree of marketization, with a 9% increase in the effect. The findings of this paper are important for actively managing the risk of dual corporate debt and credit defaults and enhancing the effectiveness of macroeconomic regulation during the epidemic period.

Market discipline and the risk‐taking behaviour of banks in India

AbstractAfter the financial crisis, the Indian banking system has accumulated a mountain of bad loans which has crippled the banking sector and halted the credit flow to the industry. Several immediate causes for the bad loan crisis have been pointed out. However, poor market discipline, the ultimate root cause of the bad loan crisis, has not been paid adequate attention. This study seeks to investigate how effectively the market disciplinary forces, captured through information disclosure, interbank deposits, concentration and ownership structure, incentivise the Indian banks to adopt prudential risk management by enhancing their risk‐weighted capital ratio. The findings of the study show that information disclosure and interbank deposits do not induce prudential risk behaviour among banks in India. However, with increasing concentration in the banking sector, a higher level of information disclosure effectively induces banks to maintain higher capital ratios, but inter‐bank deposits do not have any significant effect on bank capital. We also observe that government banks maintain lower capital ratios as compared to private banks indicating government banks' higher expectation of government bailout.

Why are BHCs organized as parent-subsidiaries? How do they grow in value?

We rationalize the organization of US banking groups into a holding company with subsidiaries – instead of branches or stand-alone units – subject to regulatory provisions of the ”source-of strength” type. We show that their value increases with debt diversity among affiliates and with complexity, as measured by the number of subsidiaries.Regulatory interventions that are aimed at ring fencing reduce (increase) the shareholder value, whenever the Governmental leniency to bailout is low (high).Branches become more valuable when there is no full commitment to internal rescue and Government bailout occurs with certainty.

Breaking the cycle of corruption in Nigeria's electricity sector: Off-grid solutions for local enterprises

Access to electricity is a major constraint to economic growth in Nigeria. Small and medium enterprises (SMEs) are arguably the segment of the Nigerian economy most disadvantaged by a lack of access to reliable power. Due to the failure of grid-based supply, over 80 % of SMEs rely on a generator to power operations. Inclusive, diversified growth in the country depends on growth of the SME sector. This paper examines how SME grid access can be improved given the technical inefficiencies and systemic corruption in the sector. In line with the political settlements framework we provide a macro-analysis of the sector which helps address and identify a solution for the main research problem of how to solve the power constraints Nigerian SMEs face. Our research, conducted between 2018 and 2019, but still valid currently, as the features we describe have not evolved substantially, identifies that the reasons for the failure of grid-based supply is a combination of interdependent factors. Technical inefficiency in the grid is high. Revenue shortfalls have also resulted in extensive government bailouts. These inefficiencies are compounded by ‘legacy’ and recent corruption that has led to poor maintenance of the transmission network during state-ownership and to the presence of politically-connected bidders in the recent privatisation efforts, leading to sub-optimal outcomes. Any solution for SMEs has to take this sectoral configuration into account. Our strategy is supported by focus groups discussions and interviews with over 30 clustered firms in the South Eastern SME hubs of Onitsha, Aba, and Nnewi.

Allocating losses: Bail-ins, bailouts and bank regulation

We study the interaction between the government's bailout policy and a bank's willingness to impose losses on (or “bail in”) investors based on its private information. In the absence of regulation, bail-ins in the early stages of a crisis are too small, while bailouts are too large and too frequent. Moreover, the bank may face a run by informed investors, creating further distortions and leading to a larger bailout. We show how a regulator with limited information can raise welfare and, in some cases, improve financial stability. The optimal policy involves partial delegation: the regulator sets bounds on the size of the bank's bail-in, but allows the bank to choose within these bounds.