Government finances and bank bailouts: Evidence from European stock markets |
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Affiliation: | 1. BBVA Research, Spain;2. John E. Walker Department of Economics, Clemson University, United States;3. Department of Business Administration, Universidad Carlos III de Madrid, Spain;1. Queen''s University, Canada;2. CREATES, Denmark;1. Department of Economics & PPGA, Universidade Federal do Rio Grande do Sul, Brazil;2. Department of Economics, Universidade Federal de Santa Catarina, Brazil |
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Abstract: | Using a sample of European banks and a series of events affecting governments' finances, we conduct an event study to examine whether there is a relationship between governments' fiscal difficulties and banks' stock returns. We find a significant reaction of banks' stocks to news concerning governments' finances. Banks' stock returns fall in response to a deterioration of governments' financial situation. We find little difference in the reaction between large and small banks. The evidence points towards all banks being equally likely to be bailed out. Our data are consistent with a policy during the Eurozone sovereign-debt crisis in which “no bank is too small to save”. |
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