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Rescuing Banks from the Effects of the Financial Crisis

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  • 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 great 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. General announcements exert cross-area spillovers but are perceived by the home-country banks as subsidies boosting the competitive advantage of foreign banks. Specific announcements exert spillovers on other banks. 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 the order of the day 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.

Suggested Citation

  • Michele Fratianni & Francesco Marchionne, 2009. "Rescuing Banks from the Effects of the Financial Crisis," Working Papers 2009-04, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  • Handle: RePEc:iuk:wpaper:2009-04
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    References listed on IDEAS

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    Cited by:

    1. Michele Fratianni & Francesco Marchionne, 2010. "Banks’ Great Bailout of 2008-2009," Working Papers 2010-03, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
    2. Eric Kwaku Attefah & Ernest Appiah Darko, 2016. "Financial Ratios Approach to Evaluating Financial Performance of Cal Bank Ghana from 2010 to 2014," International Journal of Academic Research in Business and Social Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Business and Social Sciences, vol. 6(6), pages 150-176, June.
    3. Klomp, Jeroen, 2013. "Government interventions and default risk: Does one size fit all?," Journal of Financial Stability, Elsevier, vol. 9(4), pages 641-653.
    4. Aviram Levy & Andrea Zaghini, 2010. "The pricing of government-guaranteed bank bonds," Temi di discussione (Economic working papers) 753, Bank of Italy, Economic Research and International Relations Area.
    5. Alexander Schaefer & Isabel Schnabel & Beatrice Weder di Mauro, 2013. "Financial Sector Reform After the Crisis: Has Anything Happened?," Working Papers 1304, Gutenberg School of Management and Economics, Johannes Gutenberg-Universität Mainz, revised 24 May 2013.

    More about this item

    Keywords

    announcements; financial crisis; rescue plans; undercapitalization;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • N20 - Economic History - - Financial Markets and Institutions - - - General, International, or Comparative

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