The (In)Effectiveness of Announcements of Banking Bailouts
38 Pages Posted: 29 Feb 2012 Last revised: 12 May 2014
Date Written: December 5, 2011
We analyze the effectiveness of government policies aimed at shoring up banks’ financial conditions during the 2008-2009 financial crisis. Governments injected into troubled institutions massive amounts of fresh capital and/or guaranteed bank assets and liabilities. We employ event study methodology to estimate the impact of government-intervention announcements on bank valuation. Using traditional approaches, announcements directed at the banking system as a whole were associated with positive cumulative abnormal returns whereas announcements directed at specific banks with negative ones. Findings are consistent with the hypothesis that individual institutions were reluctant to seek public assistance. However, when we correct standard errors for bank-and-time effects, virtually all announcement impacts vanish. The policy implication is that the large public commitments were either not credible or deemed inadequate relative to the underlying financial difficulties of banks.
Keywords: announcement, bank, event study, financial crisis, rescue plan
JEL Classification: G01, G21, N20
Suggested Citation: Suggested Citation