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

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.

Government intervention and bank markups: Lessons from the global financial crisis for the COVID-19 crisis

“…This novel, hand-collected dataset differs from other bank-level datasets constructed and used in the recent literature across three main dimensions. First, it covers a broader set of countries spanning both advanced economies and emerging markets compared to, for instance, Acharya et al, (2021) , who collects data for eurozone countries, and Bassett et al, (2020) , who 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, 2021 cover 2007–2012 while Bassett et al, 2020 cover 2007–2010).…”

“…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, 2021 ; 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’ markups is relatively scant and primarily focused on the United States. 3 The closest papers to ours are Berger and Roman (2015) and Calderon and Schaeck (2016) , who document opposite effects of government intervention.…”

Zombie “Landing” On Local Labor Markets

“…In their seminal paper, Peek and Rosengren (2005) find that severely undercapitalized banks in Japan during the Lost Decade were more inclined to extend new loans to poorly performing firms, suggesting that banks' incentives to conceal non-performing loans in light of the minimum capital requirement encouraged zombie lending. Similarly, recent papers, including Acharya et al (2021), Andrews and Petroulakis (2017), Storz et al (2017), and Schivardi et al (2017), find that undercapitalized banks in European countries are more likely to participate in zombie lending. On the other hand, Ogawa and Kitasaka (2000) and Giannetti and Simonov (2013) propose an alternative explanation: lending to firms in need enables banks to maintain good customer relationships and networks.…”

“…35 2based on value-added data in columns ( 1) to (3) of Table 3. Column (1) shows that, without the interaction of zombie lending with the share of low-skilled workers, the coefficient on zombie lending is negative. Although this coefficient estimate is not statistically significant, the results are indicative that zombie lending, on average, had negative effects on real value added.…”

“…As more successful firms gained access to the bond and equity markets where they could raise capital at lower costs, the banks in Japan lost many creditworthy borrowers that could bring them profits (Hoshi and Kashyap 1999;Hoshi 2001;Grossman 2013). 1 At the same time, since the banking industry in Japan was too large and too competitive, the banks there were generally unprofitable Kashyap 2004a, 1999;Kuttner and Posen 2001;Fukao 2003; Hoshi and Kashyap 2004b). Therefore, since the banks needed to find new sources of income that could offset their loss in profitable customers, they turned to the booming real estate markets for new investment opportunities.…”