What's Wrong with Government Interventions? Wrong Banks, Inadequate Strategies or Ineffective Measures?

The current crisis has promoted the regulatory authorities to implement the directives regulating the future authorities’ actions in resolving the systemic banking crises. The recent results however document that only a small portion of banks gets recovered, as a result of government interventions. With our study we look for the reason and investigate how effective are the regulatory intervention instruments. Consistent with the theory, our results show that weaker banks are more likely to get the government support during the crisis. We also document that the type of the support addresses the banks’ problems. Our regression results however indicate that at the end the intervened banks are more likely to go bankrupt than their non-intervened counterparties. We argue that government interventions must be sufficiently large, and an optimal banking recovery program should include a deep restructuring process. Our results are consistent with the literature opting for the bail-in before the implementation of the bail-out instruments.