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Cross-Border Lending, Government Capital Injection, and Bank Performance

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  • Jyh-Horng Lin

    (Department of International Business, Tamkang University, New Taipei City 25137, Taiwan)

  • Pei-Chi Lii

    (Department of Management Sciences, Tamkang University, New Taipei City 25137, Taiwan)

  • Fu-Wei Huang

    (Department of Management Sciences, Tamkang University, New Taipei City 25137, Taiwan)

  • Shi Chen

    (School of Economics, Southwestern University of Finance and Economics, Chengdu 611130, China)

Abstract

In this paper, we develop a contingent claim model to examine the optimal bank interest margin, i.e., the spread between the domestic loan rate and the deposit market rate of an international bank in distress. The framework is used to evaluate the cross-border lending efficiency for a bank that participates in a government capital injection program, a government intervention used in response to the 2008 financial crisis. This paper suggests that government capital injection is an appropriate way to recapitalize the distressed bank, enhancing the bank interest margin and survival probability. Nevertheless, the government capital injection lacks efficiency when the bank’s cross-border lending is high. Stringent capital regulation, suggested to prevent future crises by literature, leads to superior lending efficiency when the government capital injection is low.

Suggested Citation

  • Jyh-Horng Lin & Pei-Chi Lii & Fu-Wei Huang & Shi Chen, 2019. "Cross-Border Lending, Government Capital Injection, and Bank Performance," IJFS, MDPI, vol. 7(2), pages 1-20, April.
    • Handle: RePEc:gam:jijfss:v:7:y:2019:i:2:p:21-:d:221180
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