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Public Bank Guarantees and Allocative Efficiency

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  • Gropp, Reint E.
  • Guettler, Andre
  • Saadi, Vahid

Abstract

In the wake of the recent financial crisis, many governments extended public guarantees to banks. We take advantage of a natural experiment, in which long-standing public guarantees were removed for a set of German banks following a lawsuit, to identify the real effects of these guarantees on the allocation of credit ('allocative efficiency'). Using matched bank/firm data, we find that public guarantees reduce allocative efficiency. With guarantees in place, poorly performing firms invest more and maintain higher rates of sales growth. Moreover, firms produce less efficiently in the presence of public guarantees. Consistently, we show that guarantees reduce the likelihood that firms exit the market. These findings suggest that public guarantees hinder restructuring activities and prevent resources to flow to the most productive uses.

Suggested Citation

  • Gropp, Reint E. & Guettler, Andre & Saadi, Vahid, 2015. "Public Bank Guarantees and Allocative Efficiency," IWH Discussion Papers 7/2015, Halle Institute for Economic Research (IWH).
  • Handle: RePEc:zbw:iwhdps:iwh-7-15
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    Cited by:

    1. Kang, Shulong & Dong, Jianfeng & Yu, Haiyue & Cao, Jin & Dinger, Valeriya, 2021. "City commercial banks and credit allocation : Firm-level evidence," BOFIT Discussion Papers 4/2021, Bank of Finland, Institute for Economies in Transition.
    2. Fecht, Falko & Thum, Stefan & Weber, Patrick, 2019. "Fear, deposit insurance schemes, and deposit reallocation in the German banking system," Journal of Banking & Finance, Elsevier, vol. 105(C), pages 151-165.
    3. Behr, Patrick & Schmidt, Reinhard H., 2015. "The German banking system: Characteristics and challenges," SAFE White Paper Series 32, Leibniz Institute for Financial Research SAFE.
    4. Ruth Ben‐Yashar & Miriam Krausz & Shmuel Nitzan, 2018. "Government loan guarantees and the credit decision‐making structure," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 51(2), pages 607-625, May.

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    More about this item

    Keywords

    banking; public guarantees; allocative efficiency; Bankwesen; staatliche Garantien; Allokationseffizienz;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • 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
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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