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Banks’ Great Bailout of 2008-2009

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Author Info

  • Michele Fratianni

    (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)

  • Francesco Marchionne

    (Universita Politecnica delle Marche)

Abstract

This paper examines government policies aimed at rescuing banks from the effects of the financial crisis of 2007-2009. To delimit the scope of the analysis, we concentrate on the fiscal side of interventions and ignore, by design, the monetary policy reaction to the crisis. The policy response to the subprime crisis started in earnest after Lehman’s failure in mid September 2008, accelerated after February 2009, and has become very large by September 2009. Governments have relied on a portfolio of intervention tools, but the biggest commitments and outlays have been in the form of debt and asset guarantees, while purchases of bad assets have been very limited. We employ event study methodology to estimate the benefits of government interventions on banks and their shareholders. Announcements directed at the banking system as a whole (general) and at specific banks (specific) were priced by the markets as cumulative abnormal rates of return over the selected window periods. General announcements tend to be associated with positive cumulative abnormal returns and specific announcements with negative ones. Our results are also sensitive to the information environment. Specific announcements tend to exert a positive impact on rates of return in the pre-crisis sub-period, when announcements are few and markets have relative confidence in the “normal” information flow. The opposite takes place in the turbulent crisis sub-period when announcements are frequent and markets mistrust the “normal” information flow. These results appear consistent with the observed reluctance of individual institutions to come forth with requests for public assistance.

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File URL: http://www.bus.indiana.edu/riharbau/RePEc/iuk/wpaper/bepp2010-03-fratianni-marchionne.pdf
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Bibliographic Info

Paper provided by Indiana University, Kelley School of Business, Department of Business Economics and Public Policy in its series Working Papers with number 2010-03.

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Date of creation: Feb 2010
Date of revision:
Handle: RePEc:iuk:wpaper:2010-03

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Related research

Keywords: announcements; financial crisis; rescue plans; undercapitalization;

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References

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  1. Michele Fratianni & Francesco Marchionne, 2009. "Rescuing Banks from the Effects of the Financial Crisis," Mo.Fi.R. Working Papers 30, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
  2. Meulbroek, Lisa K, 1992. " An Empirical Analysis of Illegal Insider Trading," Journal of Finance, American Finance Association, vol. 47(5), pages 1661-99, December.
  3. Dell''Ariccia, Giovanni & Igan, Deniz & Laeven, Luc, 2008. "Credit Booms and Lending Standards: Evidence From The Subprime Mortgage Market," CEPR Discussion Papers 6683, C.E.P.R. Discussion Papers.
  4. Michele Fratianni & Francesco Marchionne, 2009. "The Role of Banks in the Subprime Financial Crisis," Working Papers 2009-02, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  5. Fabio Panetta & Thomas Faeh & Giuseppe Grande & Corrinne Ho & Michael King & Aviram Levy & Federico M. Signoretti & Marco Taboga & Andrea Zaghini, 2009. "An assessment of financial sector rescue programmes," Questioni di Economia e Finanza (Occasional Papers) 47, Bank of Italy, Economic Research and International Relations Area.
  6. Fratianni Michele, 2008. "Financial Crises, Safety Nets and Regulation," Rivista italiana degli economisti, Società editrice il Mulino, issue 2, pages 169-208.
  7. Burkhard Drees & Ceyla Pazarbasioglu, 1995. "The Nordic Banking Crises," IMF Working Papers 95/61, International Monetary Fund.
  8. Snower, Dennis J., 2009. "Redistribution through the Geithner Plan," Open Access Publications from Kiel Institute for the World Economy 32968, Kiel Institute for the World Economy (IfW).
  9. Jamal Ibrahim Haidar, 2009. "The mark-to-market valuation and executive pay package regulations within the 2009 US (Bailout) Emergency Economic Stabilization Act," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 12(3), pages 189-199.
  10. Richard G. Anderson, 2009. "Resolving a banking crisis, the Nordic way," Economic Synopses, Federal Reserve Bank of St. Louis.
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Cited by:
  1. Francesco Marchionne & Alberto Zazzaro, 2013. "Rischio e concorrenza nel sistema bancario italiano durante la crisi finanziaria globale," Mo.Fi.R. Working Papers 86, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.

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