#12-02
Government Interventions - Restoring or Destructing Financial Stability in the Long-Run?Financing Firms in India
Aneta Hryckiewicz, January 2012
Abstract: Recent government interventions in the banking sector has raised a considerable controversy among
the academicians, politicians and policymakers. One of the reasons is an increasing concern about
long-run effects of government banks’ bailouts. The existing academic literature is very mute with
this respect. This paper closes the gap and investigates the effect of various bailout strategies on
long-term banking sector stability. Investigating the behavior of bailed banks versus non-bailed
competitors it also identifies the sources of these effects. Our results show that government
interventions destabilize banking sectors in the long-run. Especially, public guarantees,
nationalization of private institutions as well as creation of asset management companies (AMCs)
(also so-called “The Troubled Asset Relief Funds” or “Bad Banks”) increase the risk-taking of bailed
institutions several years afterwards. We show that these effects are related to lack of appropriate
restructuring changes in the bailed institutions what does not allow them to restore their operating
performance. This in turn is a result of state ownership and diminished market control.
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