ESSAYS ON GOVERNMENT GUARANTEES & BANKING STABILITY

Abstract

IN THE FIRST CHAPTER, USING A UNIQUE DATASET OF 2236 BANKS FROM 78 COUNTRIES, WE EXAMINE THE EFFECTS OF GOVERNMENT GUARANTEES ON BANKING STABILITY OF PRIVATE, STATE AND FOREIGN OWNED BANKS. WE SHOW THAT THE MORAL HAZARD EFFECT PROVOKES HIGHER RISK TAKING FOR LOCAL PRIVATE (PROTECTED) BANKS RELATIVE TO FOREIGN (COMPETITOR) BANKS. GIVEN LONG & SHORT TERM GUARANTEES, PRIVATE BANKS BECOME RISKIER BY 26%, LENDING CONTRACTS BY 24% RELATIVE TO FOREIGN BANKS. LONG TERM GUARANTEES INCREASE STATE BANKS¿ PROFITABILITY WHILE LOAN LOSS PROVISIONING DECREASES RELATIVE TO FOREIGN BANKS. WE EXPLAIN OUR RESULTS BASED ON THE EFFECTS OF FINANCIAL FRAGMENTATION, DEBT SERVICING PRESSURES, LOAN FORBEARANCE AND PRECAUTIONARY SAVINGS. IN THE SECOND CHAPTER, WE EXAMINE THE EFFECTS OF GOVERNMENT GUARANTEES ON BANKING STABILITY OF PRIVATE, STATE AND FOREIGN OWNED BANKS FOR SEVERAL KEY HETEROGENEITIES SUCH AS INCOME LEVEL, LEGAL ORIGIN, SUPERVISORY CONTROL AND GEOGRAPHY. WE FIND THAT STATE OWNED BANKS IN