Spillover Effects of Bank Bailouts

Abstract

Do public supports to banks generate spillover effects and influence the financial stability during banking crises? By using a hand-collected dataset in Europe from 2007 to 2017, we adopt a dynamic difference-in-differences approach and show a spillover effect when the bailout is not associated with conditions: when rescued banks receive a bailout without any restricting condition, their competitors have incentives to worsen the quality of their loan portfolios by leading a reduction in their competitors’ margins. We also run an event study and show that these policies attract negative abnormal returns from investors.