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The real effects of financial protectionism

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The paper analysis the effects of government support of banks on European financial integration and firm outcomes using data on syndicated lending. According to the author the results suggest that locating bank resolution within the European Banking Union at the national level discourages international economic activity, distorts credit towards less productive firms and harms growth.

FSC Research Workshop 2018
1 November 2018
Policy paper contribution
Source: Financial Risk and Stability Network

Author:
Philipp Schaz, PhD Candidate, Humboldt University of Berlin

PDF  >  The real effects of financial protectionism

The paper has been prepared as an accompanying contribution to the Financial Stability Conference 2018 held October 31 in Berlin and presented at the FSC Research Workshop the day after at TU Berlin. Researchers from various institutions and with different backgrounds had been invited to draft policy-oriented contributions on selected aspects of the conference to be presented at the workshop, published and enclosed in the conference report.
Abstract:

The paper analyses the effects of government support of banks on European financial integration and firm outcomes using data on syndicated lending. Results show that banks increase their home bias in lending by 24.6 %, after receiving government support. In turn, discriminated foreign firms can only imperfectly substitute this fall in lending by switching banks or issuing corporate bonds. Thus, the negative loan supply effect translates into lower sales and employment growth for foreign firms. In addition, government support distorts credit allocation in the home market by shifting lending to larger, safer and less innovative firms. Moreover, the paper documents that politicians gain influence over banks by transferring control rights to the government as part of the support scheme. These results suggest that locating bank resolution within the European Banking Union at the national level discourages international economic activity, distorts credit towards less productive firms and harms growth.

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