Bank recapitalisation: a necessary but not sufficient condition for resuming lending

A common feature in all banking crises is the depletion of bank capital, which in most cases requires government intervention. The intervention takes the form of "rescue packages" and their scope is to restore the crucial functions of financial intermediation, namely lending. The core of all programmes is the recapitalisation of banks. The behaviour of recapitalised banks with regard to lending is examined from three perspectives: (a) the behaviour of banks after previous needs for recapitalisation, and particularly how the transition from the current level of capital to the new level affects the lending behaviour, (b) the ex-ante incentives to finance the economy generated from the government-sponsored rescue packages, depending on the modalities of the programmes, and (c) the ex-post impact of previous recapitalisation programmes, comparing the behaviour of banks participating in a programme and of those that did not participate. It tends to become widely accepted that recapitalisation needs first to stabilise the capital base of banks, in order to allow them to resume lending. In this perspective, bank recapitalisation is a necessary but not sufficient condition. It can only become sufficient if the modalities of the recapitalisation programme promote ex-ante incentives to resume lending. Three aspects are crucial in this regard, namely the speed of reaction, the amount of recapitalisation and the ability to address the root causes of problems.