Public Bank Lending during the Financial Crisis

ALFREDO SCHCLAREK; MICHAEL BREI

Bogota

Conferencia; 12th Annual Global Development Conference: Financing Development in a Post-Crisis World: The Need for a Fresh Look; 2011

Global Development Network

This paper studies the role of public bank lending in the event of financial crises from a theoretical and empirical perspective. On the empirical side, we compare the lending responses across public and private commercial banks to financial crises using balance sheet information for about 500 major banks from 52 countries during the period 1994 and 2009. Using panel regressions, we find evidence that public banks tend to counteract the real impact of financial crises by a higher loan supply compared to private banks. The theoretical framework allows us to explore the reasons for the different responses. Firstly, public banks have a different perspective than private banks in the event of a financial crisis in the sense that their objective is not only to minimize losses, but also to promote the recovery of the whole economy. Secondly, public banks are more likely to be recapitalized with public funds in times of distress, because their owner, the government, tends to have more financial resources than private shareholders. And finally, public banks tend to suffer less deposit withdrawals than private banks, because depositors perceive public banks as a safer alternative to private banks due to the implicit guarantee by the public sector.