State Aid and Competition in Banking: the Case of China in the Late Nineties
AbstractMany contributions to the literature on competition in banking use the Panzar and Rosse test (1987). This test encompasses a variety of market outcomes assuming firms maximize profits. However, when applied to the banking industry, this assumption may not be always valid as banks sometimes may carry social objectives or aim to be systemic players so as to be "too big to fail". This then motivates different objective functions, departing from profit maximization. We present a reduced form model where banks can pursue other goals than profit maximization. This allows us to test for behavioral changes of banks over time. Our model provides a framework to evaluate whether moral hazard issues may plague banks receiving state aid, which concerns greatly the recent debate on government intervention in financial markets during the global financial crisis in 2008. To test the impact of state aid, we examine a natural experiment in the banking sector in China in the 1990s. We cannot reject that the possibility of receiving state aid triggers moral hazard prone conduct.
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Bibliographic InfoPaper provided by LICOS - Centre for Institutions and Economic Performance, KU Leuven in its series LICOS Discussion Papers with number 25009.
Date of creation: 2009
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State Aid; banking industry; Panzar-Rosse model; Moral Hazard; To Big To Fail;
Find related papers by JEL classification:
- G01 - Financial Economics - - General - - - Financial Crises
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
- L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-01-23 (All new papers)
- NEP-COM-2010-01-23 (Industrial Competition)
- NEP-TRA-2010-01-23 (Transition Economics)
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