In this paper, we develop a contingent claim model to examine the optimal bank interest
margin, i.e., the spread between the domestic loan rate and the deposit market rate of an international
bank in distress. The framework is used to evaluate the cross-border lending eciency for a bank that
participates in a government capital injection program, a government intervention used in response
to the 2008 financial crisis. This paper suggests that government capital injection is an appropriate
way to recapitalize the distressed bank, enhancing the bank interest margin and survival probability.
Nevertheless, the government capital injection lacks eciency when the bank’s cross-border lending
is high. Stringent capital regulation, suggested to prevent future crises by literature, leads to superior
lending eciency when the government capital injection is low.
Relation:
International Journal of Financial Studies 7(2), 21
