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This paper investigates how government interventions into banking systems such as blanket guarantees, liquidity support, recapitalizations, and nationalizations affect banking competition. This debate is important because the pricing of banking products has implications for borrower and depositor welfare. Exploiting data for 124 countries that witnessed different policy responses to 41 banking crises, and using difference-in-difference estimations, the paper presents the following key results: (i) Government interventions reduce Lerner indices and net interest margins. This effect is robust to a battery of falsification and placebo tests, and the competitive response also cannot be explained by alternative forces. The competition-increasing effect on Lerner indices and net interest margins is also confirmed once the non-random assignment of interventions is accounted for using instrumental variable techniques that exploit exogenous variation in the electoral cycle and in the design of the regulatory architecture across countries. (ii) Consistent with theoretical predictions, the competition-increasing effect of government interventions is greater in more concentrated and less contestable banking sectors, but the effects are mitigated in more transparent banking systems. (iii) The competitive effects are economically substantial, remain in place for at least 5 years, and the interventions also coincide with an increase in zombie banks. The results therefore offer direct evidence of the mechanism by which government interventions contribute to banks' risk-shifting behavior as reported in recent studies on bank level runs via competition. (iv) Government interventions disparately affect bank customers' welfare. While liquidity support, recapitalizations, and nationalizations improve borrower welfare by reducing loan rates, deposit rates decline. The empirical setup allows quantifying these disparate effects.

Access to Finance --- Bailouts --- Banking competition --- Bankruptcy and Resolution of Financial Distress --- Banks & Banking Reform --- Borrower and depositor welfare --- Debt Markets --- Deposit Insurance --- Finance and Financial Sector Development --- Government interventions --- Macroeconomics and Economic Growth --- Zombie banks

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We use data for more than 2,600 European banks to test whether increased competition causes banks to hold higher capital ratios. Employing panel data techniques, and distinguishing between the competitive conduct of small and large banks, we show that banks tend to hold higher capital ratios when operating in a more competitive environment. This result holds when controlling for the degree of concentration in banking systems, inter-industry competition, characteristics of the wider financial system, and the regulatory and institutional environment.

Banks and Banking --- Finance: General --- Financial Risk Management --- Duration Analysis --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- Financial Institutions and Services: Government Policy and Regulation --- Production, Pricing, and Market Structure --- Size Distribution of Firms --- General Financial Markets: General (includes Measurement and Data) --- General Financial Markets: Government Policy and Regulation --- Banking --- Financial services law & regulation --- Finance --- Economic & financial crises & disasters --- Capital adequacy requirements --- Competition --- Commercial banks --- Deposit insurance --- Financial regulation and supervision --- Financial markets --- Financial institutions --- Bank soundness --- Financial sector policy and analysis --- Loan loss provisions --- Banks and banking --- Asset requirements --- Crisis management --- State supervision --- Switzerland --- Bank capital --- Econometric models.