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

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
https://www.sciencedirect.com/science/article/pii/S0378426618300220