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

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  • 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.

Suggested Citation

  • Michael Brei & Blaise Gadanecz, 2012. "Public recapitalisations and bank risk: evidence from loan spreads and leverage," BIS Working Papers 383, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:383
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    References listed on IDEAS

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    1. Acharya, Viral V. & Yorulmazer, Tanju, 2007. "Too many to fail--An analysis of time-inconsistency in bank closure policies," Journal of Financial Intermediation, Elsevier, vol. 16(1), pages 1-31, January.
    2. 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, vol. 83(1), pages 78-98, March.
    3. Brei, Michael & Gambacorta, Leonardo & von Peter, Goetz, 2013. "Rescue packages and bank lending," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 490-505.
    4. Bengt Holmstrom & Jean Tirole, 1997. "Financial Intermediation, Loanable Funds, and The Real Sector," The Quarterly Journal of Economics, Oxford University Press, vol. 112(3), pages 663-691.
    5. Hakenes, Hendrik & Schnabel, Isabel, 2010. "Banks without parachutes: Competitive effects of government bail-out policies," Journal of Financial Stability, Elsevier, vol. 6(3), pages 156-168, September.
    6. Michael R King, 2009. "Time to buy or just buying time? The market reaction to bank rescue packages," BIS Working Papers 288, Bank for International Settlements.
    7. 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, vol. 90(1), pages 147-165, March.
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    Cited by:

    1. Brei, Michael & Schclarek, Alfredo, 2013. "Public bank lending in times of crisis," Journal of Financial Stability, Elsevier, vol. 9(4), pages 820-830.
    2. Vincent Bouvatier & Michael Brei & Xi Yang, 2014. "Bank Failures and the Source of Strength Doctrine," EconomiX Working Papers 2014-15, University of Paris Nanterre, EconomiX.
    3. Michael Brei & Blaise Gadanecz, 2012. "Have public bailouts made banks' loan books safer?," BIS Quarterly Review, Bank for International Settlements, September.
    4. M. Brei & L. Jacolin & A. Noah, 2018. "Credit risk and bank competition in Sub-Saharan Africa," Working papers 664, Banque de France.

    More about this item

    Keywords

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

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