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Post-crisis bank behavior: lessons from Mercosur

Montfort Mlachila (International Monetary Fund, Washington, District of Columbia, USA )
Sarah Sanya (International Monetary Fund, Washington, District of Columbia, USA )

International Journal of Emerging Markets

ISSN: 1746-8809

Article publication date: 19 September 2016

468

Abstract

Purpose

The purpose of this paper is to answer one important question: in the aftermath of a systemic banking crisis, can the expected deviations in credit supply, liquidity, and other bank characteristics become entrenched in that they do not converge back to “normal”?

Design/methodology/approach

Using a panel data set of commercial banks in the Mercosur during the period 1990-2006, the authors analyze the impact of crises on four sets of financial indicators of bank behavior and outcomes – profitability, maturity preference, credit supply, and risk taking. The authors employ convergence methodology – which is often used in the growth literature – to identify the evolution of bank behavior in the region after crises.

Findings

A key finding of the paper is that bank risk-taking behavior is significantly modified leading to prolonged reduction of intermediation to the private sector in favor of less risky government securities and preference for high levels excess liquidity well after the crisis. This can be attributed to the role played by macroeconomic and institutional volatility that has nurtured a relatively high level of risk aversion in banks in the Mercosur.

Originality/value

To the best of the authors’ knowledge, using convergence methodology is a relatively novel approach in this area. An added advantage of using this approach over others currently used in the literature is that the authors can empirically quantify the rate of convergence and the institutional and macroeconomic factors that condition the convergence. Moreover, the methodology allows one to identify – in some hierarchical order – factors that condition persistent deviation from “normality.” The lessons learned from the Mercosur case study are useful for countries that suffered systemic banking crises in the aftermath of the global financial crisis.

Keywords

Citation

Mlachila, M. and Sanya, S. (2016), "Post-crisis bank behavior: lessons from Mercosur", International Journal of Emerging Markets, Vol. 11 No. 4, pp. 584-606. https://doi.org/10.1108/IJoEM-06-2015-0116

Publisher

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Emerald Group Publishing Limited

Copyright © 2016, Emerald Group Publishing Limited

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