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

65 Pages Posted: 28 Jul 2020 Last revised: 16 Aug 2020

See all articles by Viral V. Acharya

Viral V. Acharya

Professor; 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)

Maximilian Jager

University of Mannheim - Department of Economics

Sascha Steffen

Frankfurt School of Finance & Management

Lea Steinruecke

University of Mannheim

Multiple version iconThere are 3 versions of this paper

Date Written: July 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: Bank Recapitalization, evergreening, fiscal constraints, Forbearance, political economy, sovereign debt crisis, zombie lending

JEL Classification: E44, G21, G28, G32, G34

Suggested Citation

Acharya, Viral V. and Acharya, Viral V. and Jager, Maximilian and Steffen, Sascha and Steinruecke, Lea, Kicking the Can Down the Road: Government Interventions in the European Banking Sector (July 2020). CEPR Discussion Paper No. DP15009, Available at SSRN: https://ssrn.com/abstract=3650124

Viral V. Acharya (Contact Author)

Professor ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States
2129980354 (Phone)
2129954256 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~vacharya

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States
2129980354 (Phone)
2129954256 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~vacharya

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

Maximilian Jager

University of Mannheim - Department of Economics ( email )

D-68131 Mannheim
Germany

Sascha Steffen

Frankfurt School of Finance & Management ( email )

Adickesallee
32-34
Frankfurt, 60322
Germany
16097326929 (Phone)

HOME PAGE: http://www.sascha-steffen.de

Lea Steinruecke

University of Mannheim ( email )

Universitaetsbibliothek Mannheim
Zeitschriftenabteilung
Mannheim, 68131
Germany

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