Government support of banks and market discipline: International evidence

This study analyzes the effect of government support on market discipline in an international sample of banks rated by Moody's or Fitch. We also evaluate how a financial crisis and size shape the effect of government support on market discipline. We control for unobservable, country, and time-specific effects with a panel dataset of banks from 77 countries. Through this comprehensive dataset, we find that government support significantly reduces the market discipline of banks, and this effect is most reflected by an expected increase in charter value. However, market discipline is more pronounced after the 2008 financial crisis and for smaller than bigger banks. These results have important implications for banking regulation and supervision, particularly during a crisis period.