Kicking the Can Down the Road: Government Interventions in the European Banking Sector

Viral V. Acharya (), Lea Borchert (), Maximilian Jager () and Sascha Steffen ()

CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany

Abstract: We analyze the determinants and the long-run consequences of government interventions in the eurozone banking sector during the 2008/09 financial crisis. Using a novel and comprehensive dataset, we document that fiscally constrained governments “kicked the can down the road” by providing banks with guarantees instead of full-fledged recapitalizations. We adopt an econometric approach that addresses the endogeneity associated with governmental bailout decisions in identifying their consequences. We find that forbearance caused undercapitalized banks to shift their assets from loans to risky sovereign debt and engage in zombie lending, resulting in weaker credit supply, elevated risk in the banking sector, and, eventually, greater reliance on liquidity support from the European Central Bank.

Keywords: forbearance; evergreening; zombie lending; sovereign debt crisis; bank recapitalization; fiscal constraints; political economy (search for similar items in EconPapers)
JEL-codes: E44 G21 G28 G32 G34 (search for similar items in EconPapers)
Pages: 62
Date: 2023-08
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.crctr224.de/research/discussion-papers/archive/dp446 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bon:boncrc:crctr224_2023_446

Access Statistics for this paper

More papers in CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany Kaiserstr. 1, 53113 Bonn , Germany.
Bibliographic data for series maintained by CRC Office ().