Bank Bailouts and Economic Growth: Evidence from Cross-Country, Cross-Industry Data

Abstract

In this paper, we revisit the question to what extent bank bailouts affect economic growth. We adopt a broad concept of bailouts, which includes both capital injections and liquidity support to the banking system, and employ an identification strategy that controls for the various dimensions of endogeneity of bailouts. We find that liquidity support has a significant positive real economic effect, while the effect of recapitalizations per se is not statistically significant. However, the positive impact of liquidity support is driven by crises where central bank liquidity injections are accompanied by recapitalizations of the banking system. Employing bank-level data, we provide evidence that this is the case because better capitalized banks and banks in significantly recapitalized systems are more likely to provide loans, thus raising aggregate-level real economic growth.