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

62 Pages Posted: 14 Oct 2018 Last revised: 7 Jul 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

University of Mannheim

Maximilian Jager

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

Sascha Steffen

Frankfurt School of Finance & Management

Multiple version iconThere are 3 versions of this paper

Date Written: July 06, 2020

Abstract

We analyze the determinants and the long-run consequences of government interventions in the eurozone banking sector during the 2008/09 financial crisis. Using a novel and comprehensive dataset, we document that fiscally constrained governments "kicked the can down the road" by providing banks with guarantees instead of full-fledged recapitalizations. We adopt an econometric approach that addresses the endogeneity associated with governmental bailout decisions in identifying their consequences. We find that forbearance caused undercapitalized banks to shift their assets from loans to risky sovereign debt and engage in zombie lending, resulting in weaker credit supply, elevated risk in the banking sector, and, eventually, greater reliance on liquidity support from the European Central Bank.

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 (July 06, 2020). 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

University of Mannheim ( email )

L9, 1-2
Mannheim, 68131
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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