Public Recapitalisations and Bank Risk : Evidence from Loan Spreads and Leverage

A number of countries' authorities put in place bank rescue packages using public funds in response to the global financial crisis. Were these public recapitalizations followed by a reduction of risk in banks' loan books? To answer this question, in this paper the balance sheets and syndicated loan portfolios of 87 large internationally active banks, approximately half of which were rescued during the crisis, are analyzed for the period 2000–10. Evidence is presented that banks that were later rescued took on higher risk in their loan books before the crisis than banks that were not, especially in their home markets. Although the riskiness of loan signings started diminishing across the board in 2009, we do not find consistent evidence that rescued banks reduced their risk relatively more than non rescued banks during the crisis