Discussion paper

DP15009 Kicking the can down the road: government interventions in the European banking sector

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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Citation

Acharya, V, S Steffen, L Steinruecke and M Jager (eds) (2020), “DP15009 Kicking the can down the road: government interventions in the European banking sector”, CEPR Press Discussion Paper No. 15009. https://cepr.org/publications/dp15009