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

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