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

Abstract

The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

Does Quantitative Easing Mitigate the Sovereign-Bank Nexus?

“…Understanding the impact of QE on financial stability is crucial for a better understanding of the transmission mechanisms of QE, which are still openly debated in the literature. Finally, our findings may also be relevant for the burgeoning literature on zombie lending (e.g., Acharya, Borchert, Jager, and Steffen, 2020;Acharya, Crosignani, Eisert, and Eufinger, 2020), which finds that undercapitalized banks lend on to weak firms and sovereigns. While we do not look at lending to firms, we clearly document that banks have reduced their lending to sovereigns-including the weaker ones in our sample-as a consequence of QE policies.…”

Government Intervention and Bank Market Power

“…First, it covers a broader set of countries (37 to be exact) spanning both advanced economies and emerging markets compared to, for instance, Acharya et al (2020), which collects data for eurozone countries, and Bassett et al (2020), which builds a comprehensive dataset of government support to banks, but only for the United States. Second, it also covers a longer time period, relative to others focusing on the few years around the GFC and the eurozone crisis (e.g., Acharya et al 2020Acharya et al covers 2007Acharya et al -2012 while Bassett et al 2020Bassett et al covers 2007Bassett et al -2010. Third, the coverage in Igan et al (2019) focuses more narrowly on government support in the form of equity, debt, hybrid securities (e.g., contingent convertible bonds) in addition to guarantees and impaired asset relief.…”

“…While there are many studies on the drivers of interventions (Bayazitova and Shivdasani 2012;Duchin and Sosyura 2012) and the impact of interventions on lending, risk-taking, and economic activity (Black and Hazelwood 2013;Li 2013;Calomiris and Khan 2015;Berger and Roman 2017;Berger et al 2019;Acharya et al 2020;Bassett et al 2020;Berger et al 2020;Brandao-Marques, Correa, and Sapriza 2020;Duchin and Sosyura 2020), the empirical literature on the effects on banks' market power is relatively scant and primarily focused on the United States. 2 The closest papers to ours are Berger and Roman (2015) and Calderon and Schaeck (2016), who document opposite effects of government intervention on market power.…”

“…Bassett et al (2020) also has information on these patterns as they focus on outstanding amounts, whileAcharya et al (2020) focus on initial interventions.5 Impaired assets can be acquired from financial institutions by the government or by a unit acting on its behalf; they are recorded as relief when the transfer value of impaired assets onto governments' balance sheets exceeds their market value.©International Monetary Fund. Not for Redistribution…”

Supranational Rules, National Discretion: Increasing Versus Inflating Regulatory Bank Capital?

“…Supervisors should therefore be wary of regulatory capital inflation. However, national authorities might choose to be lenient on their domestic banks for a variety of reasons: they might be prone to regulatory capture and have a tendency to be too soft on their national champion banks (Goodhart, 2012;Schoenmaker, 2012;Haselmann, Singla, and Vig, 2018;Bruno and Carletti, 2019); they might want to minimize disruptions to the financial system and the real economy caused by bank failures (Brown and Dinç, 2011;Huizinga and Laeven, 2012;Walther and White, 2020); their actions might be constrained by political considerations and the electoral cycle (Brown and Dinç, 2005;Bian, Haselmann, Kick, and Vig, 2017); or government interventions in the banking sector might be infeasible due to fiscal budget constraints (Martynova, Perotti, and Suarez, 2019;Acharya, Borchert, Jager, and Ste↵en, 2020).…”