Working Paper: NBER ID: w26564
Authors: Viral V. Acharya; Nirupama Kulkarni
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.
Keywords: government guarantees; bank performance; financial crisis; emerging markets; India
JEL Codes: G01; G21; G28; H1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| government guarantees (H81) | deposit withdrawals from vulnerable private sector banks (G21) |
| government guarantees (H81) | increase in deposit base for vulnerable state-owned banks (O16) |
| 1 pp increase in MES (E49) | 705 pp increase in realized stock market returns for state-owned banks (O16) |
| 1 pp increase in MES (E49) | 685 pp decline in stock returns for private sector banks (G21) |
| deposit outflows from vulnerable private sector banks (F65) | contraction in lending (G21) |
| increased lending by vulnerable state-owned banks (F65) | deterioration in performance of loans (G21) |
| government guarantees (H81) | negative spillovers on the private banking sector (F65) |
| negative spillovers on the private banking sector (F65) | declines in economic activity in districts with deposit outflows (E44) |