Working Paper: CEPR ID: DP15009
Authors: Viral V. Acharya; Sascha Steffen; Lea Steinruecke; Maximilian Jager
Abstract: We analyze the determinants and the long-run consequences of government interventions in the eurozonebanking sector during the 2008/09 financial crisis. Using a novel and comprehensive dataset,we document that fiscally constrained governments “kicked the can down the road” by providingbanks with guarantees instead of full-fledged recapitalizations. We adopt an econometric approachthat addresses the endogeneity associated with governmental bailout decisions in identifying theirconsequences. We find that forbearance caused undercapitalized banks to shift their assets fromloans to risky sovereign debt and engage in zombie lending, resulting in weaker credit supply, elevatedrisk in the banking sector, and, eventually, greater reliance on liquidity support from theEuropean Central Bank.
Keywords: forbearance; evergreening; zombie lending; sovereign debt crisis; bank recapitalization; fiscal constraints; political economy
JEL Codes: E44; G21; G28; G32; G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Higher fiscal capacity (H69) | Likelihood of recapitalization (G32) |
| Forbearance (Y20) | Shift of asset portfolios from loans to risky sovereign debt (F65) |
| Shift of asset portfolios from loans to risky sovereign debt (F65) | Weaker credit supply (E51) |
| Forbearance (Y20) | Increased reliance on liquidity support from the European Central Bank (E58) |
| Forbearance (Y20) | Zombie lending (G21) |
| Undercapitalized banks (G21) | Reduced lending to non-zombie firms (G21) |
| Undercapitalized banks (G21) | Increased lending to zombie firms (G21) |