Yes / A large literature exists on the relationship between financial development and economic growth. The role of government and public banks in building this relationship has however, remained contentious. In this study in a sub-national level of analysis in the context of large emerging economy, India we raise the question what is the relative impact of public banks in economic growth in the lagging regions vis-à-vis leading regions? Do they matter more than the private and foreign banks? To address these problems, we apply dynamic GMM panel estimator on an unbalanced panel dataset drawn from 25 Indian states covering period 1996/97 to 2008/09. Although our study is in the Indian context, it is relevant for developing countries for mainly two reasons: government ownership of banks has been widely prevalent in developing countries and in many large countries in a federation set-up inter-state differences may exist with multiple ownership of the financial sector.

This paper examines the performance of Indian banks by studying the effects of recent reforms and macroeconomic events. Indian banks went through a period of reforms in the past twenty years. The impact of these reforms and major macroeconomic events has been examined using time-series analysis. Event studies offer additional perspective on the short-run effect of the events on different types of Indian banks. Although, the event dates are not all statistically significant in the time-series regressions, the demonetization of 2016 is significant in the event study analysis. Thus, while reforms and events have immediate impact on the performance of Indian banks, the effects did not always persist over the larger time-period.

German banking is distinguished from neighboring European banking systems by the influence of its public sector banks. Nearly 50 percent of German banking is carried out by government owned state banks (ländesbanken) and regional savings banks (sparkassen) whose roots date from the 18 th century. German banks play a particularly important role in the economy and exert more control over firms and corporations than do their American counterparts. German banks tend to be less profitable than foreign counterparts. German public banks were originally founded to foster local and regional business. However, the operations of German public sector banks now extend into all forms of international investment. German public banks are currently seeking new business models to increase profits as they are being forced to compete in the global financial market under liberal market practices dictated by the European Union. Turbulence in the global financial market precipitated by the U.S. sub‐prime mortgage meltdown has severely impacted German public sector banks, precipitating a banking crisis that leaves German taxpayers exposed to staggering losses. These global financial pressures dictate the restructuring of the German financial system. This restructuring has forced a breaking point in the traditional German corporatist banking model and is associated with significant risks to the stability of the German banking system.

The banking industry in India has undergone many phases in its history; evolving from a regulated, decentralised system in the early 1800’s, to a regulated, centralised system during British rule, to a nationalised system following India’s independence, and finally a combination of a nationalised and private system adopting global standards as it currently stands. This study has two main aims. Firstly, it will assess the relationship between the firm-specific determinants of capital structure, based on the prevailing literature, and the capital structure of public and private sector banks in India. Secondly, it will determine whether there is a difference in the firm-specific factors that contribute to the determination of the capital structure of public sector banks and private sector banks. This study adopts quantitative methods, similar to previous studies on the relationship between capital structure and its firm-specific determinants. The dependent variable, being total leverage, is regressed against multiple independent variables, being profitability, growth, firm size and credit risk (hereinafter referred to as “risk” unless otherwise indicated) in a multivariate linear regression model. This study adds to the current literature by applying the same firm-specific independent variables to the case of private and public sector banks and then to evaluate and compare the similarities and differences between the regression outputs. The results show that for private sector banks, all independent variables are statistically significant in explaining total leverage, where all the independent variables conform to the current literature on capital structure – profitability (-), firm size (-), growth (+) and credit risk (-). Conversely, for public sector banks, all independent variables were considered to be statistically significant, except for credit risk – profitability (-), firm size (+) and growth (+). These results imply that credit risk is not an important determination in a nationalised banks’ capital structure; thus, providing evidence for the moral hazard theory of public sector banks.