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

50 Pages Posted: 5 Apr 2019

Date Written: December 20, 2017

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

Suggested Citation

King, Michael Robert, Time to Buy or Just Buying Time? Lessons from October 2008 for the Cross-Border Bailout of Banks (December 20, 2017). Journal of Financial Stability, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3351962

Michael Robert King (Contact Author)

Gustavson School Of Business ( email )

University of Victoria
Business & Economics Building, Room 246
Victoria, British Columbia V8W 2Y2
Canada
250-721-6425 (Phone)

HOME PAGE: http://https://www.uvic.ca/gustavson/faculty/faculty/faculty/current/kingm.php

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