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Public recapitalisations and bank risk: evidence from loan spreads and leverage

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Author Info

  • Michael Brei
  • Blaise Gadanecz

Abstract

A number of countries' authorities put in place bank rescue packages using public funds in response to the global financial crisis. Were these public recapitalisations followed by a reduction of risk in banks' loan books? To answer this question, in this paper the balance sheets and syndicated loan portfolios of 87 large internationally active banks, approximately half of which were rescued during the crisis, are analysed for the period 2000-10. Evidence is presented that banks that were later rescued took on higher risk in their loan books before the crisis than banks that were not, especially in their home markets. Although the riskiness of loan signings started diminishing across the board in 2009, we do not find consistent evidence that rescued banks reduced their risk relatively more than non rescued banks during the crisis.

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Bibliographic Info

Paper provided by Bank for International Settlements in its series BIS Working Papers with number 383.

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Length: 39 pages
Date of creation: Jul 2012
Date of revision:
Handle: RePEc:bis:biswps:383

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Related research

Keywords: external support; portfolio choices; home bias; risk; banks; syndicated loans;

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References

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  1. Kashyap, Anil K & Stein, Jeremy C & Wilcox, David W, 1993. "Monetary Policy and Credit Conditions: Evidence from the Composition of External Finance," American Economic Review, American Economic Association, American Economic Association, vol. 83(1), pages 78-98, March.
  2. Acharya, Viral V. & Yorulmazer, Tanju, 2007. "Too many to fail--An analysis of time-inconsistency in bank closure policies," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 16(1), pages 1-31, January.
  3. Holmström, Bengt & Tirole, Jean, 1994. "Financial Intermediation, Loanable Funds and the Real Sector," IDEI Working Papers, Institut d'Économie Industrielle (IDEI), Toulouse 40, Institut d'Économie Industrielle (IDEI), Toulouse.
  4. Hendrik Hakenes & Isabel Schnabel, 2004. "Banks without Parachutes – Competitive Effects of Government Bail-out Policies," Working Paper Series of the Max Planck Institute for Research on Collective Goods, Max Planck Institute for Research on Collective Goods 2004_12, Max Planck Institute for Research on Collective Goods.
  5. Michael R King, 2009. "Time to buy or just buying time? The market reaction to bank rescue packages," BIS Working Papers, Bank for International Settlements 288, Bank for International Settlements.
  6. Kevin C. Murdock & Thomas F. Hellmann & Joseph E. Stiglitz, 2000. "Liberalization, Moral Hazard in Banking, and Prudential Regulation: Are Capital Requirements Enough?," American Economic Review, American Economic Association, American Economic Association, vol. 90(1), pages 147-165, March.
  7. Michael Brei & Leonardo Gambacorta & Goetz von Peter, 2011. "Rescue packages and bank lending," BIS Working Papers, Bank for International Settlements 357, Bank for International Settlements.
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Citations

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Cited by:
  1. Brei, Michael & Schclarek, Alfredo, 2013. "Public bank lending in times of crisis," Journal of Financial Stability, Elsevier, Elsevier, vol. 9(4), pages 820-830.
  2. Michael Brei & Blaise Gadanecz, 2012. "Have public bailouts made banks' loan books safer?," BIS Quarterly Review, Bank for International Settlements, Bank for International Settlements, September.
  3. Vincent Bouvatier & Michael Brei & Xi Yang, 2014. "Bank Failures and the Source of Strength Doctrine," EconomiX Working Papers, University of Paris West - Nanterre la Défense, EconomiX 2014-15, University of Paris West - Nanterre la Défense, EconomiX.

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