A theoretical model of bank lending: does ownership matter in times of crises?

ALFREDO SCHCLAREK; MICHAEL BREI

San Pablo

Conferencia; VIII Annual Seminar on Risk, Financial Stability and Banking; 2013

Banco Central de Brasil

The present study investigates theoretically the lending responses of government-owned and private banks in the event of unexpected nancial shocks. Our model predicts that public banks provide more loans to the real sector during times of crises, compared to private banks which cut down on lending and increase liquidity holdings. We put forth three reasons for this heterogeneous behavior. First, the objective of public banks, in contrast to their private peers, is not only to maximize prots given risks, but also to stabilize and promote the recovery of the economy. Second, public banks may suer less deposit withdrawals or avoid a bank run in a severe crisis, because the state has better access to additional funds making a recapitalization more likely. And nally, public banks may suer less deposit withdrawals due to their higher credibility in promising a future recapitalization in the case of a severe crisis.