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

Viral Acharya, Lea Borchert, Maximilian Jager and Sascha Steffen

The Review of Financial Studies, 2021, vol. 34, issue 9, 4090-4131

Abstract: We analyze government interventions in the eurozone banking sector during the 2008–2009 financial crisis. Using a novel data set, we document that fiscally constrained governments “kicked the can down the road” by providing banks with guarantees instead of fully-fledged recapitalizations. We econometrically address the endogeneity associated with bailout decisions in identifying their consequences. We find that forbearance prompted 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, a greater reliance on liquidity support from the European Central Bank.

JEL-codes: G21 G28 G32 G34 H81 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (33)

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Working Paper: Kicking the can down the road: government interventions in the European banking sector (2020)
Working Paper: Kicking the Can Down the Road: Government Interventions in the European Banking Sector (2020)
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