How effective are bad bank resolutions? New evidence from Europe

Michael Brei, Leonardo Gambacorta, Marcella Lucchetta and Bruno Maria Parigi
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Marcella Lucchetta: Department of Economics, Ca' Foscari University of Venice
Bruno Maria Parigi: Department of Economics and Management, University of Padua

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Abstract: The paper studies the effectiveness of bank resolutions using a comprehensive database on banks headquartered in 18 European countries over the period 2000–19. By means of difference-in-differences methodology, we find that impaired asset segregations – otherwise known as bad banks – have been more effective than state-funded recapitalisations of distressed banks. While recapitalised banks seem to have used the injected funds mainly to clean up their balance sheets by reducing problem loans and cutting down on lending, banks that segregated assets increased progressively their lending after the creation of the bad bank. For both types of banking crisis interventions, we find a significant ex-post reduction in the cost of bank funding and shift towards deposit funding.

Date: 2023-08
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Published in Journal of Financial Stability, 2023, 67, pp.101153. ⟨10.1016/j.jfs.2023.101153⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04272198

DOI: 10.1016/j.jfs.2023.101153

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