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

Posted: 14 Oct 2018 Last revised: 17 Mar 2020

See all articles by Viral V. Acharya

Viral V. Acharya

New York University - Leonard N. Stern School of Business; New York University (NYU) - Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); National Bureau of Economic Research (NBER)

Lea Borchert

ZEW – Leibniz Centre for European Economic Research; University of Mannheim; Frankfurt School of Finance & Management

Maximilian Jager

University of Mannheim; University of Mannheim Graduate School of Economic and Social Sciences, Students

Sascha Steffen

Frankfurt School of Finance & Management

Date Written: September 22, 2018

Abstract

Building on a novel and comprehensive dataset of all government interventions in the eurozone banking sector, we analyze the implications of government interventions in the European banking sector during the 2007 to 2009 financial crisis for the subsequent sovereign debt crisis. We find that governments with weaker public finances were more reluctant to recapitalize distressed banks during the financial crisis of 2007 to 2009. Insufficient recapitalizations of distressed banks had significant negative consequences for financial stability and real sector lending as weak banks remained vulnerable to future shocks, increased their risk-taking and did not write down defaulted loans by evergreening loans to “zombie” borrowers.

Keywords: regulatory forbearance; evergreening; zombie lending; sovereign debt crisis; bank recapitalization; fiscal constraints; political economy

JEL Classification: E44, G21, G28, G32, G34

Suggested Citation

Acharya, Viral V. and Borchert, Lea and Jager, Maximilian and Steffen, Sascha, Kicking the Can Down the Road: Government Interventions in the European Banking Sector (September 22, 2018). Available at SSRN: https://ssrn.com/abstract=3253517 or http://dx.doi.org/10.2139/ssrn.3253517

Viral V. Acharya

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

HOME PAGE: http://pages.stern.nyu.edu/~sternfin/vacharya/public_html/~vacharya.htm

New York University (NYU) - Department of Finance

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Lea Borchert

ZEW – Leibniz Centre for European Economic Research ( email )

L 7,1
Mannheim, 68161
Germany
+49 0621 1235-311 (Phone)

University of Mannheim ( email )

L9, 1-2
Mannheim, 68131
Germany

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt, 60322
Germany

Maximilian Jager

University of Mannheim ( email )

Universitaetsbibliothek Mannheim
Zeitschriftenabteilung
Mannheim, 68131
Germany

University of Mannheim Graduate School of Economic and Social Sciences, Students ( email )

Mannheim
Germany

Sascha Steffen (Contact Author)

Frankfurt School of Finance & Management ( email )

Adickesallee
32-34
Frankfurt, 60322
Germany
16097326929 (Phone)

HOME PAGE: http://www.sascha-steffen.de

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