We analyze the effects on bank valuation of government policies aimed at shoring up banks’ financial conditions during the 2008–2009 financial crisis. Governments injected into troubled institutions massive amounts of fresh capital and/or guaranteed bank assets and liabilities. We employ event study methodology to estimate the impact of government-intervention announcements on bank valuation. Using traditional approaches, announcements directed at the banking system as a whole were associated with positive cumulative abnormal returns, whereas announcements directed at specific banks with negative ones. Findings are consistent with the hypothesis that individual institutions were reluctant to seek public assistance. However, when we correct standard errors for bank-and-time effects, virtually all announcement impacts vanish in Europe, whereas they weaken in the United States. The policy implication is that the large public commitments were either not credible or deemed inadequate relative to the underlying financial difficulties of banks.

This paper examines how financial regulation and institutional quality affect the probability of a banking crisis using a panel of 138 countries over the period 1996–2017. Our key inference is that the probability of a financial crisis fits an inverted U-shaped curve: it rises as regulation stringency moves from low to medium levels and falls from medium to high levels. Countries located in the intermediate level of regulatory stringency face more financial instability than either loosely or severely regulated countries, which are caught in a “liberalization trap” and a “regulation trap,” respectively. Institutional quality interacts significantly with the regulatory environment, implying a trade-off with regulatory stringency.