Tell-tale signs & the helping hand: Early warning ratios & government guarantees

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Tell-tale signs and the helping hand: Early warning ratios an government guarantees
Telltale signs & the helping hand: Early warning ratios & government guarantees

College

Ramon V. Del Rosario College of Business

Document Type

Archival Material/Manuscript

Publication Date

2-20-2014

Abstract

Using a unique data set of 2236 banks in 78 countries, this study examines how long and short term government guarantees for private, state and foreign owned banks relate to key ratios on bank management and soundness such as capital, liquidity, asset quality and operations risk. Given short & long term government guarantees, private owned banks increase liquidity levels by around 4.01% and 0.17% respectively compared to foreign owned banks. The opposite result is true for better governed banks owning less liquid assets by around 0.13% and 0.1% respectively, relative to foreign owned banks. Short and long term government guarantees to local banks, increase tier 1 capital by around 0.6% to 0.7%. Short and long term government guarantees, result in private banks having loan portfolios with better quality, by around 0.25% and 1.9% respectively, compared to foreign owned banks. Private and state owned banks in general have a higher amount of fees and other income of around 0.24% and 0.54% as a percentage of its earnings. We provide an explanation for our results based on asset encumbrance and profit maximisation purposes and our results support the liquidity shortage hypothesis. Policy wise, we suggest improving the credibility, transparency, and strength of bank balance sheets, at the same time avoiding undue pressure on banks from un-coordinated national and international regulatory initiatives and uncertainty.

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Disciplines

Finance and Financial Management

Keywords

Ratio analysis; Loans—Government guaranty; Banks and banking; Bank stocks; Bank management

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