Blockholders & government guarantees

• Main Author: Jayasuriya, Dulani
• Format: text
• Published: Animo Repository 2014
• Subjects: Bank stocks; Banks and banking; Loans—Government guaranty; Banks and banking, Foreign; Finance and Financial Management
• Online Access: https://animorepository.dlsu.edu.ph/faculty_research/6740
• Institution: De La Salle University

This study examines how the existence of a blockholder in bank ownership effects the relationship between government guarantees and banking stability. We assemble annual database consisting of bank ownership concentration, government guarantees and accounting information for banks in 78 countries during 2001 to 2011. We find that long and short term government guarantees result in a reduction in risk and lending by 0.33% and 0.34% of state banks, reduction in lending by 0.45 % and 79% of private bank relative to foreign banks respectively. Our results contradict the risk shifting theory for banks with state and private block holders. Long and short term government guarantees result in an increment in capital ratios by around 1.7% and 8.39% of state banks relative to foreign banks. Our results suggest that blockholder ownership, contrary to popular belief does not help to alleviate instability and weakened balance sheets for local banks.