Government Guarantees and Bank Vulnerability during a Crisis: Evidence from an Emerging Market

Viral Acharya and Nirupama Kulkarni

No 26564, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We analyze the performance of Indian banks during 2007–09 relative to their vulnerability to a crisis measured using pre-crisis data, in order to study the impact of government guarantees on bank performance during a crisis. Using bank branch-level regulatory data, we exploit geographic variation in the exposure to state-owned banks to show that vulnerable private sector bank branches in districts with greater exposure to state-owned banks experienced deposit withdrawals and shortening of deposit maturity. In contrast, nearby vulnerable state-owned bank branches grew their deposit base and increased loan advances but with poorer ex-post performance of loans. Our evidence suggests that access to stronger government guarantees during aggregate crises allows even vulnerable state-owned banks to access and extend credit cheaply despite their under-performance, and this renders private sector banks especially vulnerable to crises.

JEL-codes: G01 G21 G28 H1 (search for similar items in EconPapers)
Date: 2019-12
New Economics Papers: this item is included in nep-ban and nep-ifn
Note: CF
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Citations: View citations in EconPapers (3)

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