Euro Area Bank Bailout Policies After the Global Financial Crisis Sowed Seeds of the Next Crisis
— August 10, 2020
By Viral Acharya, Lea Borchert, Maximilian Jager and Sascha Steffen
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).
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Viral Acharya is the C.V. Starr Professor of Economics