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COVID-19 outbreak, government capital injections, and shadow banking efficiency

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  • Xuelian Li
  • Yuxin Xie
  • Jyh-Horng Lin

Abstract

This paper investigates the effects of the novel coronavirus (COVID-19) outbreak and government capital injections on the bank’s optimal interest margin and the efficiency gain/loss from the shadow banking operations. The down-and-out call option approach is adapted to model the structural break in volatility to capture the COVID-19 outbreak. Results show that the COVID-19 outbreak reduces the optimal bank interest margin, government capital injections enhance the margin, and both the outbreak and capital injections harm the efficiency gain from shadow banking. COVID-19, as such, makes the bank more prone to risk-taking, thereby adversely affecting banking stability.

Suggested Citation

  • Xuelian Li & Yuxin Xie & Jyh-Horng Lin, 2021. "COVID-19 outbreak, government capital injections, and shadow banking efficiency," Applied Economics, Taylor & Francis Journals, vol. 53(4), pages 495-505, January.
    • Handle: RePEc:taf:applec:v:53:y:2021:i:4:p:495-505
    DOI: 10.1080/00036846.2020.1808183
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    Cited by:

    1. Hamzeh F. Assous & Dania Al-Najjar, 2021. "Consequences of COVID-19 on Banking Sector Index: Artificial Neural Network Model," IJFS, MDPI, vol. 9(4), pages 1-16, December.
    2. Asror Nigmonov & Syed Shams, 2021. "COVID-19 pandemic risk and probability of loan default: evidence from marketplace lending market," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 7(1), pages 1-28, December.
    3. Michał Buszko & Witold Orzeszko & Marcin Stawarz, 2021. "COVID-19 pandemic and stability of stock market—A sectoral approach," PLOS ONE, Public Library of Science, vol. 16(5), pages 1-26, May.

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