Working Paper: NBER ID: w27537
Authors: Viral V. Acharya; Lea Borchert; Maximilian Jager; Sascha Steffen
Abstract: We analyze the determinants and the long-run consequences of government interventions in the eurozone banking 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 providing banks with guarantees instead of full-fledged recapitalizations. We adopt an econometric approach that addresses the endogeneity associated with governmental bailout decisions in identifying their consequences. We find that forbearance caused 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, greater reliance on liquidity support from the European Central Bank.
Keywords: No keywords provided
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 |
|---|---|
| government interventions (H53) | forbearance (Y60) |
| forbearance (Y60) | undercapitalized banks shifting asset allocations from loans to risky sovereign debt (F65) |
| undercapitalized banks shifting asset allocations from loans to risky sovereign debt (F65) | weaker credit supply (E51) |
| weaker credit supply (E51) | increased reliance on liquidity support from ECB (E58) |
| forbearance (Y60) | zombie lending (G21) |
| zombie lending (G21) | misallocation of capital (E22) |
| sovereign's revenue-to-GDP ratio (H69) | likelihood of bank receiving recapitalization (G28) |
| undercapitalized banks (G21) | reduced lending to non-zombie firms (G21) |
| undercapitalized banks (G21) | increased lending to zombie firms (G21) |