Government Intervention and Bank Market Power: Lessons from the Global Financial Crisis for the COVID-19 Crisis

Government Intervention and Bank Market Power: Lessons from the Global Financial Crisis for the COVID-19 Crisis
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Volume/Issue: Volume 2020 Issue 275
Publication date: December 2020
ISBN: 9781513563886
$18.00
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Banks and Banking , Economics- Macroeconomics , Banks , Government intervention , Market power , Lerner index , WP , intervened bank , bank market power , TARP-recipient bank , intervention characteristic , A , measuring market power , Bank resolution , Loans , Global financial crisis of 2008-2009 , Nonperforming loans , Global

Summary

The COVID-19 pandemic could result in large government interventions in the banking industry. To shed light on the possible consequences on market power, we rely on the experience of the global financial crisis and exploit granular data on government interventions in more than 800 banks across 27 countries between 2007 and 2017. For identification, we use a multivariate matching method. We find that intervened banks experience a significant decline in market power with respect to matched non-intervened banks. This effect is more pronounced for larger and longer interventions and is driven by a rise in costs—mostly because of higher loan impairment charges—which is not followed by a similar increase in prices.