Government Bailouts and Bank Bond Spreads: Cross-Sectional Evidence from the European Union

39 Pages Posted: 19 Feb 2019 Last revised: 20 May 2020

See all articles by Benoit d'Udekem

Benoit d'Udekem

Université Libre de Bruxelles (ULB) - Solvay Brussels School of Economics and Management - Centre Emile Bernheim (CEB); Analysis Group, Inc.

Marc Van Audenrode

Université Laval - Département d'Économique; Analysis Group, Inc.

Date Written: May 19, 2020

Abstract

In the wake of the financial crisis, many governments intervened to rescue banks. Between 2007 and 2009, numerous State Aid schemes were notified to the European Commission by different Member States; only 11 were blocked. Since the crisis, European authorities have reformed their safety nets to avoid taxpayers having to step in to save banks and out of fear that bailouts may be distorting competition. We investigate whether this fear is warranted in relation to long-term wholesale funding since the EU reforms. Using an original cross-section of nearly 2,500 senior bonds issued by systemic European banks, we find that nationalized banks do not benefit from lower bond spreads compared to their peers. Our findings are identical when we instrument bail-out expectations, consistent with these expectations having dropped since the crisis. We conclude that, in good times, the new EU bank safety nets appear to have achieved their stated goals.

Keywords: banks, nationalization, state aid, funding

JEL Classification: G21, G32, K21

Suggested Citation

d'Udekem, Benoit and Van Audenrode, Marc, Government Bailouts and Bank Bond Spreads: Cross-Sectional Evidence from the European Union (May 19, 2020). Available at SSRN: https://ssrn.com/abstract=3336866 or http://dx.doi.org/10.2139/ssrn.3336866

Benoit D'Udekem (Contact Author)

Université Libre de Bruxelles (ULB) - Solvay Brussels School of Economics and Management - Centre Emile Bernheim (CEB) ( email )

ULB - Campus du Solbosch
Avenue F.D. Roosevelt 42
Brussels, B-1050
Belgium

Analysis Group, Inc. ( email )

111 Huntington Avenue
10th floor
Boston, MA 02199
United States

Marc Van Audenrode

Université Laval - Département d'Économique ( email )

2325 Rue de l'Université
Ste-Foy, Quebec G1K 7P4 G1K 7P4
Canada
418-656-3125 (Phone)

Analysis Group, Inc. ( email )

1080 Beaver Hall Hill
Suite 1810
Montreal, Quebec H2Z 1S8
Canada

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