The Banking Bailout of the Subprime Crisis: Big Commitments and Small Effects?

Michele Fratianni and Francesco Marchionne ()

No 2011-02, Working Papers from Indiana University, Kelley School of Business, Department of Business Economics and Public Policy

Abstract: This paper examines government policies aimed at rescuing banks from the effects of the financial crisis of 2008-2009. Governments responded to the crisis by guaranteeing bank assets and liabilities and by injecting fresh capital into troubled institutions. We employ event study methodology to estimate the benefits of government interventions on banks. Announcements directed at the banking system as a whole were associated with positive cumulative abnormal returns whereas announcements directed at specific banks with negative ones. The effects of foreign general announcements spilled over across different areas and were perceived by home-country banks as subsidies boosting the competitive advantage of foreign banks. Specific announcements produced effects that were consistent with other banks being crowded out for government resources. Multiple specific announcements exacerbated the extent of banks’ moral hazard. Results were sensitive to the information environment. Findings are consistent with the hypothesis that individual institutions were reluctant to seek public assistance.

Keywords: announcement; bank; event study; financial crisis; rescue plan (search for similar items in EconPapers)
JEL-codes: G01 G21 N20 (search for similar items in EconPapers)
Date: 2011-01
New Economics Papers: this item is included in nep-ban and nep-cba
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Persistent link: https://EconPapers.repec.org/RePEc:iuk:wpaper:2011-02

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