The authors examine the role of public debt in financial development. The literature has highlighted its supportive role through providing collateral and benchmark. They contrast this “safe asset” view to a “lazy banks” view: developing banking sectors that lend mainly to the public sector may develop more slowly, because it could make banks profitable but inefficient. Results from country-level and bank-level regressions are more
supportive of the “lazy banks” view, but the “safe asset” view seems to play a role at moderate levels of public debt held by banks. There is also
evidence of a harmful interaction between public debt and financial repression.