Time to Buy or Just Buying Time? Lessons from October 2008 for the Cross-Border Bailout of Banks

Abstract

This paper studies the country-level reaction of bank credit default swap (“CDS”) spreads and stock prices to bailout announcements in the US and five European countries in October 2008. Bailouts announcements are associated with bank CDS spreads narrowing, both for domestic and foreign banks, pointing to an important role for cross-border exposures. Movements in bank stock prices show mixed reactions, both domestically and cross-border, with banks receiving favorable government support outperforming foreign rivals. By January 2010, bank CDS spreads had stabilized at higher levels reflecting greater default risk, while bank stock prices remained significantly below their pre-crisis levels.

Keywords: banking crisis, bailout, credit default swaps, stock prices, contagion, competition

JEL Classification: G01, G14, G21, G28