{"title":"Do repeated government infusions help financial stability? Evidence from an emerging market","authors":"Madhu Kalimipalli , Olaleye Morohunfolu , Shankar Ramachandran","doi":"10.1016/j.jfs.2024.101334","DOIUrl":null,"url":null,"abstract":"<div><div>While government led bank capital infusions in US and other developed markets have been usually contingent an external shock or crisis episode, India presents a unique setting where significant capital infusions happen annually to stabilize the weak balance sheets of undercapitalized government owned public sector banks. Such <em>“repeated”</em> capital infusions can either better engender financial stability, given the timely government interventions; or create instability arising from possible moral hazard concerns. \"<em>Do such repeated government capital infusions lower banks’ financial risks and improve financial stability?</em>” We shed light on the question through the lens of capital infusions in the Indian market. Based on the exhaustive sample of government capital infusions into public sector banks for the period 2008–18, we find robust evidence that capital infusions are associated with economically significant higher default, capital shortfall and network risks post-infusion, signaling a moral hazard problem, where treated banks may assume more risky investments.</div></div>","PeriodicalId":48027,"journal":{"name":"Journal of Financial Stability","volume":"75 ","pages":"Article 101334"},"PeriodicalIF":6.1000,"publicationDate":"2024-10-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Journal of Financial Stability","FirstCategoryId":"96","ListUrlMain":"https://www.sciencedirect.com/science/article/pii/S1572308924001190","RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q1","JCRName":"BUSINESS, FINANCE","Score":null,"Total":0}
引用次数: 0
Abstract
While government led bank capital infusions in US and other developed markets have been usually contingent an external shock or crisis episode, India presents a unique setting where significant capital infusions happen annually to stabilize the weak balance sheets of undercapitalized government owned public sector banks. Such “repeated” capital infusions can either better engender financial stability, given the timely government interventions; or create instability arising from possible moral hazard concerns. "Do such repeated government capital infusions lower banks’ financial risks and improve financial stability?” We shed light on the question through the lens of capital infusions in the Indian market. Based on the exhaustive sample of government capital infusions into public sector banks for the period 2008–18, we find robust evidence that capital infusions are associated with economically significant higher default, capital shortfall and network risks post-infusion, signaling a moral hazard problem, where treated banks may assume more risky investments.
期刊介绍:
The Journal of Financial Stability provides an international forum for rigorous theoretical and empirical macro and micro economic and financial analysis of the causes, management, resolution and preventions of financial crises, including banking, securities market, payments and currency crises. The primary focus is on applied research that would be useful in affecting public policy with respect to financial stability. Thus, the Journal seeks to promote interaction among researchers, policy-makers and practitioners to identify potential risks to financial stability and develop means for preventing, mitigating or managing these risks both within and across countries.