Bank bailout programs in Europe: a sequential analysis of drivers and outcomes
Abstract
The determinants and effects of bank bailout programs on the economy and society are still controversial. Using a Propensity Score Matching approach relying on 22 European countries, it was identified economic growth, economic freedom, total banking assets, and liquid assets to deposits and short-term funding ratio as the main drivers for the decision to adopt a bank bailout program. The results show that the adoption of bank bailout programs did not lead to an improvement in the banks’ solvency indicators or financial performance. Still, it has amplified financial stress and income inequality instead, hampering political stability, as well as social and economic conditions. The novelty of this research resides in adding a contribution to scarce literature covering the determinants of the decision to adopt a bank bailout program, also by comprehensively expanding the set of candidate variables that may have impacted the decision for Government intervention.
Keyword : banking system, bailout program, economic indicators, institutional indicators, financial indicators, propensity score matching
How to Cite
Barbu, T.-C., Boitan, I.-A., Cepoi, C.-O., & Dumitrescu, B. A. (2021). Bank bailout programs in Europe: a sequential analysis of drivers and outcomes. Journal of Business Economics and Management, 22(3), 714-734. https://doi.org/10.3846/jbem.2021.14227
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Cardillo, G., Onali, E., & Torluccio, G. (2020). Does gender diversity on banks’ boards matter? Evidence from public bailouts. Journal of Corporate Finance, 101560 (in Press). https://doi.org/10.1016/j.jcorpfin.2020.101560
Casiraghi, M. (2020). Bailouts, sovereign risk and bank portfolio choices. Journal of Banking & Finance, 119, 105906. https://doi.org/10.1016/j.jbankfin.2020.105906
Choi, D. B. (2014). Heterogeneity and stability: Bolster the strong, not the weak. Review of Financial Studies, 27(6), 1830–1867. https://doi.org/10.1093/rfs/hhu023
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Dam, L., & Koetter, M. (2012). Bank bailouts and moral hazard: Evidence from Germany. Review of Financial Studies, 25(8), 2343–2380. https://doi.org/10.1093/rfs/hhs056
Davila E., & Walther, A. (2020). Does size matter? Bailouts with large and small banks. Journal of Financial Economics, 136(1), 1–22. https://doi.org/10.1016/j.jfineco.2019.09.005
Del Viva, L., Kasanen, E., Saunders, A., & Trigeorgis, L. (2020). US government TARP bailout and bank lottery behaviour. Journal of Corporate Finance, 66, 101777. https://doi.org/10.1016/j.jcorpfin.2020.101777
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Duchin, R., & Sosyura, D. (2012). The politics of government investment. Journal of Financial Economics, 106(1), 24–48. https://doi.org/10.1016/j.jfineco.2012.04.009
Fernandes, C., Farinha, J., Martins, F. V., & Mateus, C. (2016). Determinants of European Banks’ bailouts following the 2007–2008 financial crisis. Journal of International Economic Law, 19(3), 707– 742. https://doi.org/10.1093/jiel/jgw060
Fratzscher, M., & Berlin, D. I. W. (2019). Monetary policy, bank bailouts and the sovereign-bank risk nexus in the euro area. Review of Finance, 23(4), 745–775. https://doi.org/10.1093/rof/rfy024
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Gietl, D., & Kassner, B. (2020). Managerial overconfidence and bank bailouts. Journal of Economic Behavior & Organization, 179, 202–222. https://doi.org/10.1016/j.jebo.2020.08.019
Gropp, R., Hakenes, H., & Schnabel, I. (2011). Competition, risk-shifting, and public bail-out policies. The Review of Financial Studies, 24(6), 2084–2120. https://doi.org/10.1093/rfs/hhq114
Grossman, E., & Woll, C. (2014). Saving the banks: The political economy of bailouts. Comparative Political Studies, 47(4), 574–600. https://doi.org/10.1177/0010414013488540
Hryckiewicz, A. (2014). What do we know about the impact of government interventions in the banking sector? An assessment of various bailout programs on bank behavior. Journal of Banking & Finance, 46, 246–265. https://doi.org/10.1016/j.jbankfin.2014.05.009
Ijaz, S., Hassan, A., Tarazi, A., & Fraz, A. (2020). Linking bank competition, financial stability, and economic growth. Journal of Business Economics and Management, 21(1), 200–221. https://doi.org/10.3846/jbem.2020.11761
Jenkner, M. E., & Lu, Z. (2014). Sub-national credit risk and sovereign bailouts: Who pays the premium? (IMF working papers 14/20). International Monetary Fund. https://doi.org/10.5089/9781484398876.001
Kolliopoulos, A. (2020). The determinants of bank bailouts in Greece: Testing the extreme limits of the “Varieties of Financial Capitalism” framework, Hellenic Observatory Papers on Greece and Southeast Europe and London School of Economics and Political Science (GreeSE papers no. 148).
Li, L. (2013). TARP funds distribution and bank loan supply. Journal of Banking & Finance, 37(12), 4777–4792. https://doi.org/10.1016/j.jbankfin.2013.08.009
Littnerova, S., Jarkovsky, J., Parenica, J., Pavlik, T., Spinar, J., & Dusek, L. (2013). Why to use propensity score in observational studies? Case study based on data from the Czech clinical database AHEAD 2006–09. Cor et Vasa, 55(4), 383–390. https://doi.org/10.1016/j.crvasa.2013.04.001
Louviere, J. J., Hensher, D., & Swait, J. (2000). Stated choice methods: Analysis and application. Cambridge University Press. https://doi.org/10.1017/CBO9780511753831
Lu, W., & Whidbee, D. A. (2016). US bank failure and bailout during the financial crisis: Examining the determinants of regulatory intervention decisions. Journal of Financial Economic Policy, 8(3), 316–347. https://doi.org/10.1108/JFEP-02-2016-0011
Lucas, D. (2019). Measuring the cost of bailouts. Annual Review of Financial Economics, 11, 85–108. https://doi.org/10.1146/annurev-financial-110217-022532
McDonagh, N. (2020). The evolution of bank bailout policy: Two centuries of variation, selection and retention. Journal of Evolutionary Economics. https://doi.org/10.1007/s00191-020-00666-8
Mitrică, E., Moga, L., & Stănculescu, A. (2010). Risk analysis of the Romanian banking system – An aggregated balance sheet approach. Economics and Applied Informatics, 16(2): 177–184.
Ng, J., Vasvari, F. P., & Wittenberg-Moerman, R. (2015). Media coverage and the stock market valuation of TARP participating banks. European Accounting Review, 25(2), 347–371. https://doi.org/10.1080/09638180.2015.1029505
Peel, M. J. (2018). Addressing unobserved selection bias in accounting studies: The bias minimization method. European Accounting Review, 27(1), 173–183. https://doi.org/10.1080/09638180.2016.1220322
Remeikienė, R., Gasparėnienė, L., Chadyšas, V., & Cepel, M. (2018). Identification of the shadow economy determinants for the Eurozone member states: application of the MIMIC model. Journal of Business Economics and Management, 19(6), 777–796. https://doi.org/10.3846/jbem.2018.6276
Roman, R. A., Berger, A. N., & Sedunov, J. (2016). Do bank bailouts reduce or increase systemic risk? The effects of TARP on financial system stability (Working Paper no. 16–08). Federal Reserve Bank of Kansas City. https://doi.org/10.18651/RWP2016-08
Rosenbaum, P. R., & Rubin, D. B. (1983). The central role of the propensity score in observational studies for causal effects. Biometrika, 70(1), 41–55. https://doi.org/10.1093/biomet/70.1.41
Schroth, J. (2020). On the distributional effects of bank bailouts. Review of Economic Dynamics (in Press). https://doi.org/10.1016/j.red.2020.09.010
Stern, G. H., & Feldman, R. J. (2004). Too big to fail: The hazards of bank bailouts. Brookings Institution Press.
Taliaferro, R. (2009). How do banks use bailout money? Optimal capital structure, new equity, and the TARP (Working Paper). Harvard Business School. https://doi.org/10.2139/ssrn.1481256
Bayazitova, D., & Shivdasani, A. (2012). Assessing TARP. Review of Financial Studies, 25(2), 377–407. https://doi.org/10.1093/rfs/hhr121
Benczur, P., Cannas, G., Cariboni, J., Di Girolamo, F., Maccaferri, S., & Giudici, M. P. (2017). Evaluating the effectiveness of the new EU bank regulatory framework: A farewell to bailout? Journal of Financial Stability, 33, 207–233. https://doi.org/10.1016/j.jfs.2016.03.001
Bersch, J., Degryse, H., Kick, T., & Stein, I. (2019). The real effects of bank distress: Evidence from bank bailouts in Germany (Discussion Paper No. 38/2019). Deutsche Bundesbank. https://doi.org/10.2139/ssrn.3472868
Bustos-Contell, E., Climent-Serrano, S., & Labatut-Serer, G. (2020). A fuzzy-set qualitative comparative analysis model to predict bank bailouts: A study of the Spanish financial system. Economic Research-Ekonomska Istraživanja. https://doi.org/10.1080/1331677X.2020.1833746
Cardillo, G., Onali, E., & Torluccio, G. (2020). Does gender diversity on banks’ boards matter? Evidence from public bailouts. Journal of Corporate Finance, 101560 (in Press). https://doi.org/10.1016/j.jcorpfin.2020.101560
Casiraghi, M. (2020). Bailouts, sovereign risk and bank portfolio choices. Journal of Banking & Finance, 119, 105906. https://doi.org/10.1016/j.jbankfin.2020.105906
Choi, D. B. (2014). Heterogeneity and stability: Bolster the strong, not the weak. Review of Financial Studies, 27(6), 1830–1867. https://doi.org/10.1093/rfs/hhu023
Colombo, E., Onnis L., & Tirelli, P. (2016). Shadow economies at times of banking crises: Empirics and theory. Journal of Banking and Finance, 62, 180–190. https://doi.org/10.1016/j.jbankfin.2014.09.017
Dam, L., & Koetter, M. (2012). Bank bailouts and moral hazard: Evidence from Germany. Review of Financial Studies, 25(8), 2343–2380. https://doi.org/10.1093/rfs/hhs056
Davila E., & Walther, A. (2020). Does size matter? Bailouts with large and small banks. Journal of Financial Economics, 136(1), 1–22. https://doi.org/10.1016/j.jfineco.2019.09.005
Del Viva, L., Kasanen, E., Saunders, A., & Trigeorgis, L. (2020). US government TARP bailout and bank lottery behaviour. Journal of Corporate Finance, 66, 101777. https://doi.org/10.1016/j.jcorpfin.2020.101777
Dell’Ariccia, G., & Ratnovsky, L. (2012). Bailouts, contagion, and risk-taking. Society for Economic Dynamics Meeting Paper, 133, 1–18. https://economicdynamics.org/meetpapers/2012/paper_133.pdf
Duchin, R., & Sosyura, D. (2012). The politics of government investment. Journal of Financial Economics, 106(1), 24–48. https://doi.org/10.1016/j.jfineco.2012.04.009
Fernandes, C., Farinha, J., Martins, F. V., & Mateus, C. (2016). Determinants of European Banks’ bailouts following the 2007–2008 financial crisis. Journal of International Economic Law, 19(3), 707– 742. https://doi.org/10.1093/jiel/jgw060
Fratzscher, M., & Berlin, D. I. W. (2019). Monetary policy, bank bailouts and the sovereign-bank risk nexus in the euro area. Review of Finance, 23(4), 745–775. https://doi.org/10.1093/rof/rfy024
Friedman, J. H. (2001). Greedy function approximation: A gradient boosting machine. The Annals of Statistics, 29(5), 1189–1232. https://doi.org/10.1214/aos/1013203451
Gerhardt, M., & Vander Vennet, R. (2017). Bank bailouts in Europe and bank performance. Finance Research Letters, 22, 74–80. https://doi.org/10.1016/j.frl.2016.12.028
Gietl, D., & Kassner, B. (2020). Managerial overconfidence and bank bailouts. Journal of Economic Behavior & Organization, 179, 202–222. https://doi.org/10.1016/j.jebo.2020.08.019
Gropp, R., Hakenes, H., & Schnabel, I. (2011). Competition, risk-shifting, and public bail-out policies. The Review of Financial Studies, 24(6), 2084–2120. https://doi.org/10.1093/rfs/hhq114
Grossman, E., & Woll, C. (2014). Saving the banks: The political economy of bailouts. Comparative Political Studies, 47(4), 574–600. https://doi.org/10.1177/0010414013488540
Hryckiewicz, A. (2014). What do we know about the impact of government interventions in the banking sector? An assessment of various bailout programs on bank behavior. Journal of Banking & Finance, 46, 246–265. https://doi.org/10.1016/j.jbankfin.2014.05.009
Ijaz, S., Hassan, A., Tarazi, A., & Fraz, A. (2020). Linking bank competition, financial stability, and economic growth. Journal of Business Economics and Management, 21(1), 200–221. https://doi.org/10.3846/jbem.2020.11761
Jenkner, M. E., & Lu, Z. (2014). Sub-national credit risk and sovereign bailouts: Who pays the premium? (IMF working papers 14/20). International Monetary Fund. https://doi.org/10.5089/9781484398876.001
Kolliopoulos, A. (2020). The determinants of bank bailouts in Greece: Testing the extreme limits of the “Varieties of Financial Capitalism” framework, Hellenic Observatory Papers on Greece and Southeast Europe and London School of Economics and Political Science (GreeSE papers no. 148).
Li, L. (2013). TARP funds distribution and bank loan supply. Journal of Banking & Finance, 37(12), 4777–4792. https://doi.org/10.1016/j.jbankfin.2013.08.009
Littnerova, S., Jarkovsky, J., Parenica, J., Pavlik, T., Spinar, J., & Dusek, L. (2013). Why to use propensity score in observational studies? Case study based on data from the Czech clinical database AHEAD 2006–09. Cor et Vasa, 55(4), 383–390. https://doi.org/10.1016/j.crvasa.2013.04.001
Louviere, J. J., Hensher, D., & Swait, J. (2000). Stated choice methods: Analysis and application. Cambridge University Press. https://doi.org/10.1017/CBO9780511753831
Lu, W., & Whidbee, D. A. (2016). US bank failure and bailout during the financial crisis: Examining the determinants of regulatory intervention decisions. Journal of Financial Economic Policy, 8(3), 316–347. https://doi.org/10.1108/JFEP-02-2016-0011
Lucas, D. (2019). Measuring the cost of bailouts. Annual Review of Financial Economics, 11, 85–108. https://doi.org/10.1146/annurev-financial-110217-022532
McDonagh, N. (2020). The evolution of bank bailout policy: Two centuries of variation, selection and retention. Journal of Evolutionary Economics. https://doi.org/10.1007/s00191-020-00666-8
Mitrică, E., Moga, L., & Stănculescu, A. (2010). Risk analysis of the Romanian banking system – An aggregated balance sheet approach. Economics and Applied Informatics, 16(2): 177–184.
Ng, J., Vasvari, F. P., & Wittenberg-Moerman, R. (2015). Media coverage and the stock market valuation of TARP participating banks. European Accounting Review, 25(2), 347–371. https://doi.org/10.1080/09638180.2015.1029505
Peel, M. J. (2018). Addressing unobserved selection bias in accounting studies: The bias minimization method. European Accounting Review, 27(1), 173–183. https://doi.org/10.1080/09638180.2016.1220322
Remeikienė, R., Gasparėnienė, L., Chadyšas, V., & Cepel, M. (2018). Identification of the shadow economy determinants for the Eurozone member states: application of the MIMIC model. Journal of Business Economics and Management, 19(6), 777–796. https://doi.org/10.3846/jbem.2018.6276
Roman, R. A., Berger, A. N., & Sedunov, J. (2016). Do bank bailouts reduce or increase systemic risk? The effects of TARP on financial system stability (Working Paper no. 16–08). Federal Reserve Bank of Kansas City. https://doi.org/10.18651/RWP2016-08
Rosenbaum, P. R., & Rubin, D. B. (1983). The central role of the propensity score in observational studies for causal effects. Biometrika, 70(1), 41–55. https://doi.org/10.1093/biomet/70.1.41
Schroth, J. (2020). On the distributional effects of bank bailouts. Review of Economic Dynamics (in Press). https://doi.org/10.1016/j.red.2020.09.010
Stern, G. H., & Feldman, R. J. (2004). Too big to fail: The hazards of bank bailouts. Brookings Institution Press.
Taliaferro, R. (2009). How do banks use bailout money? Optimal capital structure, new equity, and the TARP (Working Paper). Harvard Business School. https://doi.org/10.2139/ssrn.1481256