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Kicking the Can Down the Road: Government Interventions in the European Banking Sector

Author

Listed:
  • Viral V Acharya
  • Lea Borchert
  • Maximilian Jager
  • Sascha Steffen

Abstract

We analyze government interventions in the eurozone banking sector during the 2008–2009 financial crisis. Using a novel data set, we document that fiscally constrained governments “kicked the can down the road” by providing banks with guarantees instead of fully-fledged recapitalizations. We econometrically address the endogeneity associated with bailout decisions in identifying their consequences. We find that forbearance prompted 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, a greater reliance on liquidity support from the European Central Bank.

Suggested Citation

  • Viral V Acharya & Lea Borchert & Maximilian Jager & Sascha Steffen, 2021. "Kicking the Can Down the Road: Government Interventions in the European Banking Sector," The Review of Financial Studies, Society for Financial Studies, vol. 34(9), pages 4090-4131.
    • Handle: RePEc:oup:rfinst:v:34:y:2021:i:9:p:4090-4131.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhab002
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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts

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