The Objective Function of Government-controlled Banks in a Financial Crisis

Author Name OGURA Yoshiaki (Waseda University)
Creation Date/NO. January 2016 16-E-004
Research Project Study on Corporate Finance and Firm Dynamics
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We present evidence that government-controlled banks significantly increased its lending to small and medium-sized enterprises (SMEs) whose main bank is a large bank operating internationally or nationwide in the 2007-2009 financial crisis. Further analyses show that both the weak relationship between them and the crowding-out due to the demand surge of large corporations that were temporarily shut out of the securities market contributed to this phenomenon. The mixed Cournot oligopoly model including a government-controlled bank, a profit-maximizing main bank providing a differentiated service, and other profit-maximizing banks providing a non-differentiated service shows that the above finding regarding a weak relationship is consistent with government-controlled banks maximizing welfare rather than their own profit.

Published: Ogura, Yoshiaki, 2018. "The objective function of government-controlled banks in a financial crisis," Journal of Banking & Finance, Vol. 89, pp. 78-93