Public Bank Guarantees and Allocative Efficiency

Reint Gropp, Andre Guettler and Vahid Saadi

No 7/2015, IWH Discussion Papers from Halle Institute for Economic Research (IWH)

Abstract: In the wake of the recent financial crisis, many governments extended public guarantees to banks. We take advantage of a natural experiment, in which long-standing public guarantees were removed for a set of German banks following a lawsuit, to identify the real effects of these guarantees on the allocation of credit ('allocative efficiency'). Using matched bank/firm data, we find that public guarantees reduce allocative efficiency. With guarantees in place, poorly performing firms invest more and maintain higher rates of sales growth. Moreover, firms produce less efficiently in the presence of public guarantees. Consistently, we show that guarantees reduce the likelihood that firms exit the market. These findings suggest that public guarantees hinder restructuring activities and prevent resources to flow to the most productive uses.

Keywords: banking; public guarantees; allocative efficiency; Bankwesen; staatliche Garantien; Allokationseffizienz (search for similar items in EconPapers)
JEL-codes: D22 D61 G21 G28 G31 G32 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-cba
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Public bank guarantees and allocative efficiency (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:iwhdps:iwh-7-15

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