What Do We Know about the Impact of Government Interventions in the Banking Sector? The Assessment of Various Bailout Programs on Bank Behavior
41 Pages Posted: 27 Mar 2013 Last revised: 8 Apr 2013
Date Written: March 26, 2013
Abstract
The systemic banking crises placed enormous pressure on national governments to intervene. The empirical literature is mute on what the optimal bailout program should look like to mitigate the negative consequence of government intervention in the banking sector. We document that, in general, government interventions have a negative impact on banking sector stability, increasing its risk significantly afterwards. Our results show that nationalization and Asset Management Companies (AMCs) among the restructuring measures, and public guarantees among the liquidity support mechanisms, tend to contribute to the risk effect the most. The optimal bailout package should include mechanisms aimed at strengthening market monitoring in the post-crisis period. Liquidity provisions and government-assisted mergers are an example of such a strategy.
Keywords: government Interventions, crisis, bailout, financial stability
JEL Classification: G21, G28
Suggested Citation: Suggested Citation
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