Citation

Discussion Paper Details

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Title: Kicking the can down the road: government interventions in the European banking sector

Author(s): Viral V. Acharya, Maximilian Jager, Sascha Steffen and Lea Steinruecke

Publication Date: July 2020

Keyword(s): Bank Recapitalization, evergreening, fiscal constraints, Forbearance, political economy, sovereign debt crisis and zombie lending

Programme Area(s): Financial Economics

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.

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Bibliographic Reference

Acharya, V, Jager, M, Steffen, S and Steinruecke, L. 2020. 'Kicking the can down the road: government interventions in the European banking sector'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=15009