The performance of European banks after government bailouts.

• Thesis title in Czech: Výkonnost evropských bank po krizi: Jaký vliv měly vládní záchranné balíky?
• Thesis title in English: The performance of European banks after government bailouts.
• Academic year of topic announcement: 2020/2021
• Thesis type: diploma thesis
• Thesis language: angličtina
• Department: Institute of Economic Studies (23-IES)
• Supervisor: PhDr. Jaromír Baxa, Ph.D.
• Author: hidden - assigned by the advisor
• Date of registration: 19.10.2020
• Date of assignment: 19.10.2020
• Date and time of defence: 26.01.2022 09:00
• Date of electronic submission: 04.01.2022
• Date of proceeded defence: 26.01.2022
• Opponents: prof. PhDr. Petr Teplý, Ph.D.

Guidelines

Motivation:

During the 2007 financial crisis European banking system run into difficulties when many banks were lacking liquidity. Instability and enormous losses resulted in government bailout policies in various forms. These policies were aimed to avoid bank runs, bank failures and to restore fragile financial system in European economies. Since the outbreak of the crisis, more than 1,5 trillion euros has been spent to finance severely affected banks. Such expensive government policies obviously provoked a storm of criticism over the fact that troubled banks were financed by taxpayers’ money. For this reason, we should be able to assess whether bailouts had positive effects on banks performance and their behavior.
Although bailouts effectively helped to maintain lending activities, contributed to restore bank funding and reduced risk of default, we do not know what effect they had on performance of rescued banks. Gergardt and Vander Vennet (2016) claim that aided banks increase their performance only slowly after received help.
On the other hand, government bailouts could have resulted in more risky behavior of banks and might have get used to being rescued. For example, Hryckiewicz (2014) finds out that government interventions are associated with significantly increased risk in the banking sector.

Hypotheses:
1. The performance of banks which benefited from government bailout programs in years 2007-2013 has not improved.
2. An increase in performance of aided banks in the EU was poorer compared to aided banks in the US.
3. The performance of bailed banks is different among EU with banks in the “core” countries performing better than banks in the “periphery”.

Expected Contribution:
In the current academic literature, we can find much about causes of bank distress and bank failures. However, there is little discussion about the ex-post performance of banks which were bailed out. Although some studies have been made on individual policies such as government guarantees, liquidity provisions or capital injections, but the effects of overall bailout policy is still lacking. Yet, it is soon to analyze the overall effect of rescue policies because some of them are still in progress.
Nevertheless, It would be beneficial to bring along an up-to-date analysis on the performance of banks after bailouts. The reason is obviously that we want to know if such broad and costly policies have had some positive effect in the long run. With the current pandemic crisis, some are expecting another banking crisis, thus policymakers should possess an analysis of efficiency of previous government rescues and behaviour of banks after received help. It can open a discussion whether policymakers should not force involved banks to make more effort after the bailout and improve quickly their management.

References

Brei, Michael and Blaise Gadanecz. Have public bailouts made banks’ loan books safer? 2013. BIS Quarterly Review September 2012.
Cornett
Fratzscher, Marcel and Malte Rieth. Monetary Policy, Bank Bailouts and the Sovereign-Bank Risk Nexus in the Euro Area, 2015. European Economy Discussion Paper 009.
Gergardt, Maria and Rudi Vander Vennet. Bank bailouts in Europe and bank performance, 2017. Finance Research Letters.
Harris Oneil, Huerta Daniel and Thang Ngo. The impact of TARP on bank efficiency, 2012. Journal of International Financial Markets Institutions and Money 24(1):85–104.
Hryckiewicz, Aneta. What do we know about the impact of government interventions in the banking sector? An assessment of various bailout programs on bank behavior, 2014. Journal of Banking & Fina
nce. 46:246-265.

Preliminary scope of work

Methodology:
To test hypotheses, data from Moody’s Analytics BankFocus will be used. I will create a database of banks which benefited from government bailouts between years 2007 and 2013 and those who did not according to prespecified criteria (e.g. size of bank). The performance of banks will be measured/described by a set of variables used in CAMELS rating such as equity ratio, core tier 1 capital, loan loss provisions, non-performing loans, cost/income ratio, net interest margin, interbank funding and size.
Inspired by Gerhardt and Vander Vennet (2016) I will compare these two groups of banks before and after bailout by carrying out a two-sample mean difference t-tests. As a second step, I will run logit regressions with bank-specific variables as well as with macroeconomic control variables (for two years following the bailout.?)
The second hypothesis will be tested similarly. I will create a database of US banks which received any form of government aid and a control group of banks which were not bailed out. Then, I will make a comparison of banks which benefited from bailout in the EU with these in the US.
To test the third hypothesis, I will compare banks across European Union, specifically across two groups of states – “core” and “periphery”.

Outline:
The expected structure of your thesis (try to be specific).
1. Introduction
2. Banking crisis in the European Union – causes, course, effects and comparison with the US banking crisis
3. Government bailout programs – forms, applications and comparison with the US bailouts
4. Literature review on effects of government bailouts
5. Data – selection of data, creation of database
6. Model
7. Results
8. Conclusion