Determinants of European Banks' Bailouts Following the 2007-2008 Financial Crisis

Abstract

Extraordinary amounts of public funds and/or assistance were made available to banks since the onset of the 2007-2008 financial crisis. Governments worldwide have launched a massive bailout package to support banks in distress. Using a probit model, this paper investigates the likelihood of bailouts following the financial crisis. Our results lead us to conclude that the governance characteristics of banks, specifically the characteristics of boards, bank risks, as well as bank-level and country-specific banking sector features, explain the likelihood of bailouts in the European banking sector. In particular we find that board banking experience, longer directors’ tenure, less busy boards and the existence of a corporate governance committee decrease the likelihood of banks participating in a bailout programme. Inversely, board independence, credit and liquidity risks increase the probability of banks being bailed out. Furthermore, fewer limitations on banking freedom and greater openness of the banking sector have a harmful impact on the occurrence of bailouts. Our study therefore suggests relevant policy implications, which might help supervisors, regulators and other public authorities in avoiding costly bailouts.