“Lazy banks” and “Safe asset” Hypothesis: Is it the answer to Public Debt and Financial Development Indicators Puzzle in Emerging Markets?

Abstract

This paper investigates the role of public debt in financial development in an emerging market namely, Jordan. Based on previous empirical research, we test the empirical prediction of two hypotheses for the role of public debt: “safe asset” vs “lazy banks”. Using annual data throughout 2008 to 2018 and using the Fixed Effect (FE) and Bias Correction Fixed Effects (BCFE) methodologies that control for both unobservable banks specific and time-specific variables. We find that public debt has a positive impact on financial development after controlling for Banks size, and Banks risk. ROA, Capital Adequacy, and Banks Capitalization. The results provide weak evidence consistent with the “Safe Asset” hypothesis that banks choose to invest in treasury securities as safe assets.