Government Intervention and Bank Market Power: Lessons from the Global Financial Crisis for the COVID-19 Crisis

IMF Working Papers, December 11, 2020

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The COVID-19 pandemic could result in large government interventions in the banking industry.
The paper analyzes the experience of the global financial crisis using granular data on government interventions in more than 800 banks across 27 countries between 2007 and 2017.
Identification strategy: a multivariate matching method.
Core result: intervened banks experience a significant decline in market power with respect to matched non-intervened banks.
Mechanism: the decline in market power is more pronounced for larger and longer interventions and is driven by a rise in costs—mostly because of higher loan impairment charges—which is not followed by a similar increase in prices.

Intervened banks show a significant decline in market power relative to matched non-intervened banks.
The effect is:
- More pronounced for larger interventions.
- More pronounced for longer interventions.
The decline in market power is primarily driven by:
- A rise in costs, mostly because of higher loan impairment charges.
- No comparable increase in prices following the cost rise.

Large government interventions during the COVID-19 crisis may reduce bank market power, as observed during the global financial crisis.
The size and duration of interventions matter: larger and longer interventions are associated with larger declines in market power.
Cost-side effects—particularly higher loan impairment charges—can erode market power if not transmitted into higher prices.

Subject: Bank resolution, Financial crises, Financial institutions, Global financial crisis of 2008-2009, Loans, Nonperforming loans, Stocks
Keywords: A. measuring market power, bank market power, Bank resolution, Banks, Global, Global financial crisis of 2008-2009, Government intervention, intervened bank, intervention characteristic, Lerner index, Loans, Market power, Nonperforming loans, TARP-recipient bank, WP