Does Government Debt Affect Bank Credit?

Abstract

This paper analyses 43 countries from 1970 to 2010 to investigate the effect that public debt has on bank loans. The study is motivated by the need to understand the consequences of high public debt, a condition many countries are already experiencing or will experience in the next few years. Looking at the 40-year period, we find that the ratio of government debt to GDP has a negative association with the subsequent growth of bank credit. Our results hold using different econometric methods and controlling for variables such as the lagged value of bank loans, the occurrence of banking crises, per capita GDP, the inflation rate, trade openness, international investment position, stock market capitalization and countries' legal origin.Ã We express our special thanks to the editor and two anonymous referees for very useful suggestions that greatly improved the quality of the paper. We are also grateful to

The Impact of Domestic Investors’ Participation in Government Debt on Bank Loans to the Private Sector: A Cross-Country Study

“…The estimation results confirm that domestic bank participation in government debt may potentially reduce bank loans to the private sector, as found by several previous studies (Bouis, 2019;Christensen, 2004;De Bonis and Stacchini, 2013;Gennaioli et al, 2018;Hauner, 2009;Mbate, 2013). Furthermore, the negative impact is greater in advanced than in emerging countries due to greater nominal government debt in advanced countries, a finding which confirms Gennaioli et al, (2018).…”

“…In addition, our study is motivated to compare the impact of the domestic investors' participation in government debt on bank loans to the private sector between advanced and emerging countries because prior studies documented inconclusive findings. For instance, De Bonis and Stacchini (2013) and Gennaioli et al (2018) show the negative impact is greater in more developed than less developed countries due to a higher volume of government debt in more developed countries. However, Ismihan and Ozkan (2012) show theoretically that the negative impact is greater in a country with a lower depth financial market, which is identical to a less developed country.…”

“…Several empirical studies have also confirmed the negative association between domestic investors' participation in government debt and bank loans to the private sector. However, they mainly focus on the impact of total domestic participation (Christensen, 2004;De Bonis and Stacchini, 2013;Mbate, 2013) or only domestic bank participation (Bouis, 2019;Gennaioli et al, 2018;Hauner, 2009) in government debt on bank loans to the private sector. Our study differs from these studies and contributes to the literature in two ways.…”

Household Debt in OECD Countries: The Role of Supply-Side and Demand-Side Factors

“…Following a Ricardian equivalence argument, public debt could influence taxation and hence household saving and debt. In recent years, firms and households have reduced their levels of debt, while in most countries public debt has continued to rise as an effect of the Great Recession and bank bail-outs (De Bonis and Stacchini 2013;IMF 2012b). In 2016 the public debt/GDP ratio was greater than in 2007 in most of the countries of our sample.…”

External Public Debt, Trade Linkages and Contagion During the Eurozone Crisis

“…As for the reverse direction of the causal link, excessive public debt has been found to impact negatively on the subsequent credit growth (De Bonis and Stacchini, ). In the Eurozone crisis, the rise in interest rates on government bonds has been followed by an increase in the cost of banks’ funding, thus leading to a higher cost of bank loans and to a credit deceleration (Albertazzi et al., ).…”