On Zombie Banks and Recessions after Systemic Banking Crises: Government Intervention Matters

Tinbergen Institute Discussion Paper 13-039/IV/DSF54

34 Pages Posted: 6 Mar 2013 Last revised: 10 Feb 2014

See all articles by Sweder van Wijnbergen

Sweder van Wijnbergen

Universiteit van Amsterdam; Tinbergen Institute; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Timotej Homar

University of Amsterdam; Tinbergen Institute

Date Written: February 2014

Abstract

Systemic banking crises often continue into recessions with large output losses. In this paper we ask whether the way governments intervene in the financial sector has an impact on the economy's subsequent performance. Our theoretical analysis focuses on bank incentives to manage bad loans. We show that interventions involving bank recapitalizations provide banks with incentives to restructure bad loans and free up resources for new economic activity. When the fundamental problem is undercapitalization of the banking sector, other interventions, such as guarantees on bank liabilities and liquidity support, lead banks to roll over bad loans, tying up resources in distressed firms: they become zombie banks and a drag on economic recovery. We then analyze 68 systemic banking crises from the period 1980-2013, of which 28 are part of the recent global financial crisis, and find that bank recapitalizations substantially reduce recession duration.

Keywords: Financial crises, intervention policies, zombie banks, economic recovery, bank restructuring, bank recapitalization

JEL Classification: E44, E58, G21, G28

Suggested Citation

van Wijnbergen, Sweder and Homar, Timotej, On Zombie Banks and Recessions after Systemic Banking Crises: Government Intervention Matters (February 2014). Tinbergen Institute Discussion Paper 13-039/IV/DSF54. Available at SSRN: https://ssrn.com/abstract=2228611 or http://dx.doi.org/10.2139/ssrn.2228611

Sweder Van Wijnbergen (Contact Author)

Universiteit van Amsterdam ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands
+31 20 525 4011 / 4203 (Phone)
+31-35-624 91 82 (Fax)

Tinbergen Institute

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Timotej Homar

University of Amsterdam ( email )

Spui 21
Amsterdam, 1018 WB
Netherlands

Tinbergen Institute

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

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