Kicking the Can Down the Road: Government Interventions in the European Banking Sector
Posted: 14 Oct 2018 Last revised: 17 Mar 2020
Date Written: September 22, 2018
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
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