Analysis of Stigma and Bank Credit Provision

Abstract

Bank rescue programs are designed to provide assistance to struggling financial intermediaries during financial crises. A complicating factor is that participating banks are often stigmatized by accepting assistance from the government. This paper investigates stigma in two ways: (i) it examines how stigma changes a bank's decision to seek assistance from the rescue program, and (ii) it analyzes how stigma affects a bank's ability to operate as a financial intermediary using a joint model for bank-level application, approval, and lending decisions. The empirical results indicate that stigma hinders the objectives of the rescue program and slows the production of credit.