Systemic banking crises have placed enormous pressure on national governments to intervene. The empirical literature, however, is inconclusive on what an optimal bailout program should look like to mitigate the negative consequences of government interventions in the banking sector. We find that, in general government interventions have a negative impact on banking sector stability, significantly increasing its risk. In particular, we find that among bailout measures, nationalization and asset management companies (AMCs) contribute most to the risk effect and that among liquidity support mechanisms, public guarantees are the largest contributor to the risk effect. However, we also find that by making an appropriate choice of intervention mechanisms, governments can mitigate the negative consequences stemming from the above-mentioned effects.

The level as well as fluency of capital supply on the interbank market is crucial for banking sector liquidity. However, the dominance of individual players on this market leads to liquidity imbalance and, thus, might increase the risk for other banks. We test how different bank exposures in interbank market translates into other bank liquidity risk and credit supply. To this end, we use 207 bank exits from interbank markets between 1997 and 2013 in 52 emerging and developed countries. We find that the withdrawal of a bank with high net exposure on interbank market leads to a statistically significant drop in the liquidity position of the remaining banks. The effect is also economically significant. Finally, we find that a liquidity imbalance adversely affects the bank credit supply. Our findings suggest that the consequences are more severe for banks heavily relying on the local interbank market, for emerging countries and surprisingly in pre-crisis periods.

Government interventions as a solution to systemic banking crises continue to receive wide criticism. The new regulatory frameworks advocate banks’ bail-ins and resolutions that do not require governments’ involvement. However, as the recent events with Credit Suisse and Silicon Valley Bank show, the government still plays an active role in rescuing and resolving the bank's problems. We use the financial stability model of Goodhart et al.’s (2005, 2006a) to analyze the effects of various bank policy interventions on banks’ performance during the crisis rescue phase. We then explore whether those interventions work effectively in facilitating bank recovery and whether they reduce systemic risk in the long run. We use a unique granular bank-level dataset from 22 advanced economies covering the 1992–2017 period. We find that bank recapitalization without debt resolution measures does not resolve bank distress. The empirical results document that “bad-bank” resolution is positively correlated with a bank’s recovery as well as lower systemic risk. Those findings contribute to the ongoing debate on the optimal bank resolution architecture during systemic events.

We examine the international transmission of liquidity shocks from multinational bank holding companies to their subsidiaries during the financial crisis of 2008. Our results demonstrate that a subsidiary's reduction in lending is strongly related to its parent bank's lending via the interbank market. While subsidiaries that were dependent on interbank financing increased their credit supply prior to the crisis, they reduced their lending activities during the crisis. Additionally, we observe that interbank-dependent subsidiaries tried to change their funding strategy when they were unable to increase their deposit growth significantly during the crisis. During the crisis, subsidiaries could not rely on their parent banks’ support via the interbank market and encountered problems in attracting new depositors, which could explain the significant decline in lending during the financial crisis. These findings highlight the need to regulate and monitor multinational funding strategies, especially in the interbank market.