Miserable or Lucky? Aid targeted to the financial sector

Our research investigates the linkage between financial aid and bank stability, focusing on the channels of financial development and macroprudential policy. We select recipient countries and particularly emphasize those receiving aid targeted at the financial sectors as the subjects of analysis. These countries often face economic instability and rely on external aid to stabilize their economic conditions or promote national financial reforms to restructure their financial system. We find that increasing financial sector-targeted aid correlates to a significant increase in non-performing loans and default risk, reducing bank stability. Our findings highlight the critical roles played by financial development and macroprudential policy in mediating financial aid’s impact on bank stability. This paper sheds light on the mechanisms involved and offers valuable insights for banks to improve their financial development and for policymakers to enhance the effectiveness of macroprudential policies.