Kicking the can down the road: government interventions in the European banking sector

Viral Acharya, Sascha Steffen, Lea Steinruecke and Maximilian Jager

No 15009, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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)
Date: 2020-07
New Economics Papers: this item is included in nep-ban, nep-fdg and nep-mac
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Citations: View citations in EconPapers (8)

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Journal Article: Kicking the Can Down the Road: Government Interventions in the European Banking Sector (2021)
Working Paper: Kicking the Can Down the Road: Government Interventions in the European Banking Sector (2020)
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