Euro area bank bailout policies after the global financial crisis sowed seeds of the next crisis | VOX, CEPR Policy Portal – voxeu.org

Euro area bank bailout policies after the global financial crisis sowed seeds of the next crisis | VOX, CEPR Policy Portal – voxeu.org

When considering interventions in the banking sector during crises, governments can either use system-wide or bank-specific measures (Farhi and Tirole 2012). Bank-specific measures can be grouped into three categories (Pazarbasioglu et al. 2011) – (1) guarantees, (2) capital injections, and (3) asset restructuring/resolution – the implementation of which induces different fiscal costs (Stavrakeva 2020).

In a new paper (Acharya et al., 2020), we investigate government interventions in the context of the global financial crisis using a novel, hand-collected dataset of all aid measures granted to euro area banks during the 2007 to 2009 period. While banks across all European countries were in distress, bailout decisions were subject to the discretion and the fiscal constraints of national governments. Key measures of fiscal capacity (inversely, constraints) are, among others, government revenues (as percentage of GDP) and the total debt of the country (as percentage of GDP).

Figure 1 shows the average development of these fiscal capacity measures for GIIPS countries (Greece, Ireland, Italy, Portugal, and Spain) and non-GIIPS euro area countries. Evidently, GIIPS countries appear more fiscally constrained based on both measures throughout the two decades from 1998 to 2018.

Figure 1 Fiscal capacity of GIIPS vs. non-GIIPS countries

We find that countries with a higher fiscal capacity were more likely to recapitalise their banks in the immediate aftermath of the global financial crisis. Moreover, these countries linked their bailout decisions more closely to observable metrics such as the banks’ size, capitalisation, or profitability, while fiscally weaker countries applied more discretion (i.e. forbearance).

Consequences of
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