COVID-19 outbreak, government capital injections, and shadow banking efficiency

Xuelian Li, Yuxin Xie and Jyh-Horng Lin

Applied Economics, 2021, vol. 53, issue 4, 495-505

Abstract: This paper investigates the effects of the novel coronavirus (COVID-19) outbreak and government capital injections on the bank’s optimal interest margin and the efficiency gain/loss from the shadow banking operations. The down-and-out call option approach is adapted to model the structural break in volatility to capture the COVID-19 outbreak. Results show that the COVID-19 outbreak reduces the optimal bank interest margin, government capital injections enhance the margin, and both the outbreak and capital injections harm the efficiency gain from shadow banking. COVID-19, as such, makes the bank more prone to risk-taking, thereby adversely affecting banking stability.

Date: 2021
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DOI: 10.1080/00036846.2020.1808183

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