The Long Shadow of the Global Financial Crisis: Public Interventions in the Financial Sector
  • 1 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund
  • | 2 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund

We track direct public interventions and public holdings in 1,114 financial institutions over the period 2007–17 in 37 countries based on publicly available information. We use aggregate official data to validate this new dataset and estimate the fiscal impact of interventions, including the value of asset holdings remaining in state hands at end-2017. Direct public support to financial institutions amounted to $1.6 trillion ($3.5 trillion including guarantees), with larger amounts allocated to lower capitalized and less profitable banks. As of end-2017, only a few countries had fully divested the initial support they provided during the crisis. Public holdings were divested faster in better capitalized, more profitable, and more liquid banks, and in countries where the economy recovered faster. In countries where the government stake remained high relative to the initial intervention, private investment and credit growth were slower, financial access, depth, efficiency, and competition were worse, and financial stability improved less.

Abstract

We track direct public interventions and public holdings in 1,114 financial institutions over the period 2007–17 in 37 countries based on publicly available information. We use aggregate official data to validate this new dataset and estimate the fiscal impact of interventions, including the value of asset holdings remaining in state hands at end-2017. Direct public support to financial institutions amounted to $1.6 trillion ($3.5 trillion including guarantees), with larger amounts allocated to lower capitalized and less profitable banks. As of end-2017, only a few countries had fully divested the initial support they provided during the crisis. Public holdings were divested faster in better capitalized, more profitable, and more liquid banks, and in countries where the economy recovered faster. In countries where the government stake remained high relative to the initial intervention, private investment and credit growth were slower, financial access, depth, efficiency, and competition were worse, and financial stability improved less.

I. Introduction

Substantial government interventions in financial institutions were a hallmark of the response to the Global Financial Crisis (GFC). In many countries, governments went beyond liquidity provision and took stakes in individual institutions through capital injections or purchased or guaranteed impaired assets. These interventions were necessary, but often unpopular. In large part, they accomplished what they intended to: stabilize markets and repair balance sheets to restart the economy. This, however, came at a cost: emerging public frustration against using taxpayers’ money to rescue the financial institutions that many regarded as the culprits of the crisis. Frustration turned into resentment, especially where fiscal austerity followed because the costs of the interventions threatened the financial standing of the sovereign. While unlikely to change this sentiment, taking stock of the fiscal costs of government interventions in support of the financial sector, as well as of the remaining assets in the hands of the public sector, is important to let taxpayers know how their money has been used.

This paper reviews government interventions in the financial sector a decade after the GFC. It sheds light on the costs of these interventions on the public purse by focusing on the fiscal implications of direct government interventions.1 To do so, we compile and present a new bank-level dataset on government interventions. The dataset allows us to track public asset holdings over the period 2007–17 and estimate intervened financial assets remaining in the hands of the public sector at end-2017. We then compare these data with official aggregate data specifically collected for this exercise and provide an update of the total fiscal impact of interventions, including the value of remaining public assets.

Our dataset improves transparency and can hence contribute to accountability. While most authorities publish data on their interventions in the financial sector, the presentation of the data is far from uniform and understanding the complex underlying transactions is often cumbersome. In addition, some countries have yet to publish intervention data, a decade after the GFC and despite the fact that significant public resources were involved. These issues make cross-country comparisons difficult, inhibiting accountability and hampering analysis geared at learning lessons. The uniform approach across countries which we pursue allows for such analysis and sheds a light on bank liabilities remaining in public hands.

Such transparency is important because interventions may create both direct and indirect economic distortions. Not only do interventions may interfere with how markets function, but they also potentially affect the signaling value of asset prices and financial flows. The resulting resource misallocation could have significant long-term consequences for productivity, competition, and growth (Kane, 1990; Peek and Rosengren, 2005; Caballero et al., 2008; Richardson and Troost, 2009; Calderon and Schaeck, 2016; Storz et al., 2017). These misallocations are potentially sizeable as direct interventions mobilize a sizable volume of public funds, the recovery of which is not only highly uncertain, but also takes time (IMF, 2015; Laeven and Valencia, 2018). Stylized facts based on our new datasets are in line with such concerns.2

Moreover, prolonged state ownership of banks may not be desirable in its own right. State-owned banks often pursue objectives other than value maximization, sometimes driven by (in)direct political interference or explicit quasi-fiscal mandates. As a result, on average, they tend to be less profitable, hold less core capital, and exhibit greater credit risk than privately-owned banks (Cornett et al., 2010).3 These patterns could explain the association between higher government ownership of banks and lower subsequent growth of productivity and per capita income (La Porta et al., 2002). Moreover, lending decisions of state-owned banks may be influenced by political considerations, potentially leading these banks to take excessive risks without proper pricing (Sapienza, 2004; Claessens et al., 2008), with implications for both financial stability and the real economy (Carvalho, 2014; Coleman and Feler, 2015). The stylized facts derived from our dataset are in line with state-owned banks being less profitable and riskier than their privately-owned counterparts.

Our dataset consists of newly compiled bank-level data, cross-checked with aggregate country-level data. We gather data on the interventions into and the remaining public asset holdings in 1,114 financial institutions across 37 advanced economies and emerging markets (representing 62 percent of global GDP) from public records and other publicly available information. We validate these data at the country level with government and central bank sources for a smaller sample of the 28 European Union (EU) countries and the United States. Through the latter sources, we also complement the bank-level data with updated information on government acquisition of impaired assets and the financial costs and benefits stemming from government asset holdings.4 Accordingly, we present a dataset with an unparalleled granularity on the accumulation and unwinding of financial interventions with the broadest possible coverage of countries, institutions, and types of intervention.

The benefits of our bank-level database lie in its granularity. We compile data at the level of specific transactions in individual banks. This allows us to gauge the association between bank characteristics and the amount of and the way in which support was provided, as well as the implications for bank-level outcomes—something that the literature that relies on aggregate country-level data cannot do. Furthermore, our database allows us to track the evolution of the assets acquired during the GFC and focus on those remaining in public hands today, comparing their value to the cost of intervention. The granularity of our data comes at a cost of a relatively narrow country and time coverage. We focus on 37 countries in the post-GFC period, whereas the Laeven-Valencia database covers 165 countries from 1970 onwards.

Our country-level dataset complements the existing literature on the costs of banking crises. Our data combines stock and flow data, akin to the approach adopted by EU countries in the Excessive Deficit Procedure (EDP) Supplementary Tables and Financial Assistance Measures Tables (EC 2018; ECB 2016). This stock-flow approach differs from cash-flow methods used, for instance, by Laeven and Valencia (2008, 2013, 2018) who do not distinguish between acquired assets and capital injections (transfers) provided to the financial institutions (Box 2 provides further details on the differences between the two approaches). Still, methodological challenges in recording interventions persist. These are mainly due to asset valuation, the classification of financial support, and the use of special purpose vehicles and defeasance structures to provide support.5

Encouragingly though, the correspondence between our bank-level data and the country-level data on gross direct interventions is close. The average (absolute value) difference between the two methodologies is 0.52 percentage point of 2017 GDP (see Appendix III for details).

The main insights from our data can be summarized as follows:

  • Since 2007, cumulative gross direct public interventions in financial institutions in the countries in our sample amounted to some $1.6 trillion. In addition, guarantees extended to these institutions amounted to some $1.9 trillion, bringing the total amount of support to $3.5 trillion.

  • On average, governments recorded net cumulative indirect benefits from these interventions. That is, they received dividends and fees from asset holdings that exceeded interest payments on debt issued to finance these interventions. Even so, variations across countries are large, with only just over half the countries seeing such indirect benefits.

  • The unwinding of direct support has been uneven with only a few countries fully divesting their financial sector holdings. At end-2017, public equity holdings remain sizable in Ukraine, Luxembourg, Portugal, Greece, and Belgium. Public holdings of impaired assets are still substantial in Austria, Slovenia, and Germany.

We also observe interesting correlations between interventions and both individual bank characteristics and aggregate macro-financial indicators. While we do not establish the direction of causality, we highlight a few stylized facts that illustrate the long shadow the GFC has cast:

  • Bank characteristics. The initial government support was higher in banks that had less capital and were less profitable. Public asset holdings were divested faster over time in better capitalized, more profitable, and more liquid banks.

  • Macro-financial indicators. Public asset holdings were divested faster in countries where the economy recovered faster. Countries where the government stake remains high relative to the initial intervention display slower private investment and credit growth, as well as a deterioration in financial access, depth, efficiency, and competition, and less improvement in financial stability.

The remainder of this paper is organized as follows. Section II describes financial sector support since the GFC, focusing on gross direct interventions in individual financial institutions and depicting some stylized facts. Section III details the public asset holdings in these entities and discusses some patterns in the data. Section IV complements bank-level data by providing data on impaired asset holdings that were transferred to the public sector balance sheet and the fiscal impact of direct interventions at end-2017. Section V concludes with directions for potential future and forthcoming work.

II. Gross Direct Interventions in the Aftermath of the Crisis

A. Data Coverage

Our sample covers Australia, Brazil, Canada, Japan, New Zealand, Russia, Switzerland, Ukraine, the United States, and the 28 European Union (EU) countries. We focus on post-GFC interventions that result in an outright government stake in a financial institution.6 These primarily involve asset purchases. In order to see whether the type of instrument used in asset purchases has a bearing on the outcomes (e.g., the speed of divestment), we distinguish three broad modes of such support: equity shares, hybrid securities, and debt.7 We also gather information on extended guarantees and impaired asset relief.8

The collection of these data promotes transparency. The U.S. Department of the Treasury and the Japanese Deposit Insurance Corporation regularly publish the gross financial interventions into and the remaining stakes in institutions in the aftermath of the crisis. The British, Irish, and Spanish authorities are also comprehensive and transparent in their disclosure efforts. The data in the other countries covered in our sample, however, are not as easily accessible from a single national source. As a result, our data sources are wide and varied, comprising, e.g., reports of legal counsels of national central banks, court rulings, public letters between national agencies, and numerous additional official sources. Throughout, a primary source comprises the European Commission’s state aid reports and annual bank reports. We supplement this information with data from S&P Market Intelligence, which includes financial institution annual reports. A full list of data sources can be found in Appendix I.

The compilation of these data is challenging. First, numerous banks that existed in 2007 ceased operations during the crisis or were acquired by other (often public) entities. This makes tracking divestment and hence estimating the remaining public stake difficult. Second, gauging the specific nature of some interventions requires detailed analysis of the notes to banks’ annual statements. Third, the way in which governments intervened in the financial sector often involved complex transactions among several parties, complicating the ownership structure of the public stake in intervened banks. In some cases, the state became a direct stakeholder, whereas in other cases one or more state-controlled entities were used.9 Detailed descriptions of these methodological challenges and how we address them in the construction of the database are in Appendix I.

B. Bank-Level Interventions: A First Glance

We document total public support amounting to some $3.5 trillion, spread out broadly across the banking system and aiding more than a thousand banks (Table 1). Such support consisted of $1.6 trillion in gross direct interventions and $1.9 trillion in guarantees.

Table 1.

Gross Direct Interventions by Year

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Sources: National authorities; European Commission; bank reports; IMF staff estimates .Note: This table shows the banks that received aid in a given year both in absolute numbers ( “number of banks”) and in terms of their assets as a percent of total system assets (“percent of system assets”), as well as the total extended aid documented in the dataset in billion USD. The rows for the first two indicators cannot be summed over time as a bank would appear in more than one column if it was intervened multiple times (therefore, summing would lead to double-counting). Interventions include asset acquisitions, extended guarantees, and impaired asset relief. Big banks are those with over $50 billion in total assets. System assets are the total assets of the financial sector in the sample. Exchange rates a re expressed at year end. Numbers may not add up due to rounding. Data reflect the available information as of April 2018 for EU countries and as of end-2018 for the United States.

The support is driven neither by specific countries nor by specific big banks (defined as those with over $50 billion in total assets). This speaks to the global nature of both the crisis and our dataset. While US institutions comprise a majority of the banks in our sample (63 percent, or 707 out of 1,114 entities), they received less than 10 percent of the total support we document.10 Big banks received two thirds of the documented aid over the whole 2007–17 period, even though they represent the vast majority of bank assets in our sample. The share of support going to big banks fluctuates between a high of 86 percent in 2008 and a low of 37 percent in 2011. This might be attributed to the systemic nature of these banks: being more closely interlinked and, hence, more exposed to global shocks, they received the lion’s share of public support early in the crisis. After the initial shock, the macro-financial outlook progressively worsened in the years after 2008. As a result, the initial shock likely propagated to small and medium-sized banks that subsequently also faced liquidity and solvency issues. This transmission mechanism might have led to a more balanced allocation of gross direct interventions across banks of different size in the following years.

Table 1 further shows that both the number of banks receiving aid and the total extended aid peaked in 2009. While the former is driven by the Troubled Asset Relief Program (TARP) in the United States, the latter is not, reflecting that the crisis and the corresponding intervention wave quickly propagated across the globe. At the peak, 20 percent of the total financial assets in the countries covered in our sample belonged to banks that received government support.11

Aggregated at the country level, our data reveal that the magnitudes vary widely across countries (Figure 1). Greece (45.6 percent of GDP), Ireland (23.5 percent of GDP), and Cyprus (18 percent of GDP) provided the largest support to their banks. At the opposite end of the spectrum, public support was lowest in Lithuania, Japan, and Sweden (all below 0.2 percent of GDP). These patterns are consistent with findings by previous studies, such as Laeven and Valencia (2018), on the relative magnitude of gross direct interventions.

Figure 1.
Figure 1.

Cumulative Direct Interventions by Country

(2007–17; in percent of 2017 GDP)

Citation: IMF Working Papers 2019, 164; 10.5089/9781513508337.001.A001

Sources: National authorities; European Commission; bank reports; IMF staff estimates.Note: This figure shows the cumulative direct public interventions in banks from 2007 to 2017, expressed as a percent of 2017 GDP. Data reflect the available information as of April 2018 for EU countries and as of end-2018 for the United States.

Turning to the types of interventions, we focus our attention on asset purchases given that these arguably represent the most direct way we can capture the stake a government takes in a bank.12

Equity was the most frequently used instrument for bank recapitalization (Table 2). Next came hybrid instruments, while debt to individual institutions was used least frequently. Only eight countries in our sample used all three instruments and the choice of the primary instrument is far from uniform (see Figure 8 in Section III.B, where we discuss these patterns further). For instance, Belgium and Ireland acquired equity shares and hybrid securities with little use of debt. In contrast, Bulgaria, Denmark, Hungary, and the Netherlands heavily relied on debt instruments (see Figures A3A5 in the Appendix for the full picture).

Table 2.

Asset Purchases by Instrument

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Sources: National authorities; European Commission; bank reports.Note: This table shows the banks that were subject to asset purchases by year in absolute numbers (“number of banks”) and in terms of their assets as a percent of total system assets (“percent of system assets”) by type of instrument (equity, hybrid instruments, and debt). System assets are the total assets of the financial sector in the sample. Data reflect the available information as of April 2018 for EU countries and as of end-2018 for the United States.
Figure 2.
Figure 2.

Initial Public Holdings by Bank Characteristics

(in percent of total bank equity)

Citation: IMF Working Papers 2019, 164; 10.5089/9781513508337.001.A001

Sources: National authorities; European Commission; bank reports; S&P Market Intelligence, IMF staff estimates.Note: This figure shows the average initial public holdings in a bank as a percent of the bank’s total equity on the vertical axes by various levels of capital adequacy, liquidity, profitability, and asset quality on the horizontal axes. Public holdings are calculated as the winsorized total public holdings of equity, hybrid instruments, and debt divided by the bank’s total equity. The initial stake is the first intervention the bank received. Bank variables (capital adequacy, liquidity, profitability, and asset quality) are measured during the year preceding the first intervention and are labeled high (low) relative to the sample mean. High (low) capital adequacy indicates above-(below-) average Tier 1 capital ratio. Liquidity is measured by the ratio of liquid assets to total assets. High (low) liquidity indicates above-(below-) average liquid assets to total assets. Profitability is measured by the return on assets. High (low) profitability indicates above-(below-) average return on assets. Asset quality is measured by the ratio of problem loans to gross customer loans. High (low) asset quality indicates below-(above-) average problem loans to gross customer loans. Data reflect the available information as of April 2018 for EU countries and as of end-2018 for the United States.
Figure 3.
Figure 3.

Public Asset Holdings by Instrument

(2017; in percent of GDP)

Citation: IMF Working Papers 2019, 164; 10.5089/9781513508337.001.A001

Sources: National authorities; European Commission; bank reports; IMF staff estimates.Note: This figure shows public asset holdings in banks in 2017, expressed as a percent of 2017 GDP. Data reflect the available information as of April 2018 for EU countries and as of end-2018 for the United States.
Figure 4.
Figure 4.

Remaining Public Holdings by Bank Characteristics

(in percent of total bank equity)

Citation: IMF Working Papers 2019, 164; 10.5089/9781513508337.001.A001

Sources: National authorities; European Commission; bank reports; S&P Market Intelligence, IMF staff estimates.Note: This figure shows the average remaining public holdings in a bank as a percent of the bank’s total equity on the vertical axes by various levels of capital adequacy, liquidity, profitability, and asset quality on the horizontal axes. Public holdings are calculated the winsorized total public holdings of equity, hybrid instruments, and debt divided by the bank’s total equity. The remaining stake is as of 2017. Bank variables [profitability, capitalization, liquidity, and asset quality] are measured in 2016 and are labeled high [low] relative to the mean. Capitalization is measured by the Tier 1 ratio. High [low] capitalization indicates above-[below-] average Tier 1 capital ratio. Liquidity is measured by the ratio of liquid assets to total assets. High [low] liquidity indicates above-[below-] average liquid assets to total assets. Profitability is measured by the return on assets. High [low] profitability indicates above-[below-] average return on assets. Asset quality is measured by the ratio of problem loans to gross customer loans. High [low] asset quality indicates below-[above-] average problem loans to gross customer loans. Data reflect the available information as of April 2018 for EU countries and as of end-2018 for the United States.
Figure 5.
Figure 5.

Bank Liabilities in Public Hands

(2007–17; in percent of GDP)

Citation: IMF Working Papers 2019, 164; 10.5089/9781513508337.001.A001

Sources: National authorities; European Commission; bank reports; IMF staff estimates.Note: This figure shows the evolution of public holdings in banks that received public support since the GFC as a percent of GDP. T is the country-specific date of first intervention in either equity shares, hybrid securities, or debt instruments. Data reflect the available information as of April 2018 for EU countries and as of end-2018 for the United States.
Figure 6.
Figure 6.

Divestment and Macroeconomic Aggregates

Citation: IMF Working Papers 2019, 164; 10.5089/9781513508337.001.A001

Sources: IMF World Economic Outlook, Haver Analytics, IMF staff calculations.Note: This figure shows the cumulative percent change in macroeconomic variables between 2008 and 2017 across country groups that differ by the divestment rate of public stakes in banks which received public support since 2008. A country has a high[low] divestment rate if it experienced above- [below-] average drops in public holdings between the peak holdings and 2017. Private investment is measured as the gross fixed capital formation. Data reflect the available information as of April 2018 for EU countries and as of end-2018 for the United States.
Figure 7.
Figure 7.

Divestment and Financial System Characteristics

Citation: IMF Working Papers 2019, 164; 10.5089/9781513508337.001.A001

Sources: World Bank Global Financial Development Database, IMF staff calculations.Note: This figure shows the cumulative percent change in structural variables between 2008 and 2016 across country groups that differ by the divestment rate of public stakes in banks which received public support since 2008. A country has a high [low] divestment rate if it experienced above- [below-] average drops in public holdings between the peak holdings and 2017. Except for the Lerner index, the cumulative percent change in each structural variable is calculated as the average of several structural indicator changes. Financial access is bank branches per 100,000 adults. Financial depth includes five indicators: private credit by deposit-money banks [DMBs] to GDP; DMBs’ assets to GDP; nonlife insurance premium volume to GDP; private credit by DMBs and other financial institutions to GDP; and domestic credit to the private sector. Financial efficiency includes seven indicators: bank net interest margin; bank overhead costs to total assets; bank return on assets after tax; bank return on equity after tax; bank return on assets before tax; bank return on equity before tax; and credit to government and state-owned enterprises. Financial stability includes two indicators: bank regulatory capital to risk-weighted assets and liquid assets to deposits and short-term funding. Calculations are as of 2016 because a later update was not available at the time of calculation except for the Lerner index, which was calculated as of 2014. Data reflect the available information as of April 2018 for EU countries and as of end-2018 for the United States.
Figure 8.
Figure 8.

Direct Holdings by Instrument Pecking Order

(2007–17; in percent of GDP)

Citation: IMF Working Papers 2019, 164; 10.5089/9781513508337.001.A001

Sources: National authorities; European Commission; bank reports; IMF staff estimates.Note: This figure shows the evolution of public holdings of bank equity shares, hybrid instruments, and debt securities in countries that have used all three types of interventions since the GFC as a percent of GDP. Data reflect the available information as of April 2018.

There is no comprehensive theoretical framework analyzing the choice of instrument and, arguably, this is another case where, by necessity, “regulatory practice has run somewhat ahead of theory” (Blanchard and Summers 2017). While riskier and more expensive, equity provides more control over the intervened bank’s operations. Such control can be particularly desirable when managerial quality is a concern. It also allows the government to share the upside when the bank returns to profit. The patterns in our data suggest that many governments opted for intervening in banks this way. Notably, even though 86 percent of asset purchases over the sample period used equity (831 out of 966 banks in Table 2), the two earliest intervention cases of the crisis came in the form of debt: in 2007 to the German lender Sachsen LB and the British bank Northern Rock. This could be an indication that, when problems first appeared, their severity was not truly understood and support in a form that provided limited control over bank operations was deemed to be sufficient. Although most equity interventions occurred in the first five years after the crisis, we recorded equity interventions as late as 2017.13,14

Bank characteristics may have determined the size of interventions, providing lessons for future bank resolutions. We see some patterns between individual bank characteristics and the initial government stakes taken in these banks. First, splitting the sample by key bank soundness indicators such as capital adequacy, liquidity, profitability, and asset quality, we examine the resulting summary statistics in Figure 2. The patterns reveal that the initial government stake tends to be higher in banks with weaker soundness indicators. Those differences, however, are not statistically significant at conventional levels—a result that speaks to the wide variation across these banks. A possible explanation for the lack of a statistically significant difference at this level is that, when systemic risk is high, governments may (preemptively) intervene in banks that may look fine based on the commonly used financial soundness indicators but could be fragile nonetheless. In addition, policymakers may employ moral suasion to get good banks (i.e., banks not prima facie in need of support) to accept support, in order to avoid stigma on bad banks (see, e.g., Johnson and Kwak, 2011, for further on such incentives on the policymakers’ end).

We look at these patterns more in depth through simple regressions on both initial and peak interventions. In these, we analyze both bank characteristics and countries’ macro-financial conditions. This analysis is for the purpose of confirming that the stylized facts we observe survive beyond bivariate relationships (while not claiming any causal interpretation). The generic specification we use is:

StakebctK=α+βXbc,t1+γYc,t+ϵbct

where the left-hand side variable is the government’s stake in bank b in country c at time t. Here, X is a vector of lagged bank characteristics (capitalization, liquidity, profitability, and asset quality in the period before the intervention, as well as lagged total assets) and Y is a vector of macro-financial conditions (real GDP growth, credit growth, inflation, unemployment, public debt-to-GDP ratio, monetary policy rate, and the financial stress index). Bank characteristics are lagged by one year to allay potential endogeneity. Country-level macro-financial conditions are not lagged since it is less likely that a stake in a specific single bank would affect the overall conditions in the country. Also, it is arguably more relevant to explore the contemporaneous relationship between the stake and macro-financial conditions given the feedback loops between the banking system and macroeconomic outcomes. Error terms are clustered at the country level. Given this possible endogeneity, we interpret the results as correlations rather than causal links.

The superscript K distinguishes whether we are looking at the initial stake (as measured by the first intervention a bank receives from a government in the form of asset purchase divided by the bank’s total equity at the time) or the peak stake (the maximum cumulative level of public asset holdings reached during the period between the time of first intervention and 2017, again scaled by total equity of the bank). That is, we run two sets of cross-sectional regressions using ordinary least squares to understand if and how the size of the initial or peak stake relates to the bank and country conditions prevailing around that time. Note that t varies by bank and refers to the year in which a given bank was intervened for the first time when the dependent variable is the initial stake and to the year in which the government stake was at its maximum when the dependent variable is the peak stake.

The size of the government’s first intervention is negatively correlated with capitalization (total equity divided by total assets) and profitability (net interest margin), albeit the latter association is statistically significant at a marginal level (Table 3). When we include all bank characteristics in the same regression, however, capitalization, liquidity, and profitability (return on average assets) all have negative and statistically significant coefficients15. This is also broadly true for peak government stake and the relationship with profitability (return on average assets) is stronger in this case, although the relationship with liquidity is not significant (Table 4).

Table 3.

Initial Government Stake and Bank/Country Conditions

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Sources: National authorities; European Commission; bank reports; S&P Market Intelligence, IMF staff estimates.Note: This table shows the results of regressing the initial stake that a government holds in a bank on bank characteristics and country conditions. The initial stake is computed as the winsorized total public holdings of equity, hybrid instruments, and debt divided by the bank’s total equity. Capitalization is measured by Tier 1 ratio or, alternatively, by total capita l ratio. Liquidity is measured by the ratio of liquid assets to total assets. Profitability is measured by return on average assets or, alternatively, by net interest margin. Asset quality is measured by the ratio of problem loans to gross customer loans. All bank-level variables are lagged by one year. Robust sta nda rd errors a reclustered at the country l evel.
Table 4.

Peak Government Stake and Bank/Country Conditions

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Sources: National authorities; European Commission; bank reports; S&P Market Intelligence, IMF staff estimates.Note: This table shows the results of regressing the peak stake that a government holds in a bank on bank characteristics and country conditions. The peak stake is computed as the winsorized total public holdings of equity, hybrid instruments, and debt divided by the bank’s total equity. Capitalization is measured by Tier 1 ratio or, alternatively, by total capita l ratio. Liquidity is measured by the ratio of liquid assets to total assets. Profitability is measured by return on average assets or, alternatively, by net interest margin. Asset quality is measured by the ratio of problem loans to gross customer loans. All bank-level variables are lagged by one year. Robust sta nda rd errors a re cl ustered at the country l evel.

These findings suggest that, broadly speaking, banks with weaker fundamentals need and are allocated larger public resources. By highlighting the potential cost differential (as indicated by the size of the intervention) between intervening in weaker and stronger banks, these patterns can help inform future bank resolutions and provide additional support for the role of strong prudential regulation in reducing the need for government support.

Among the variables capturing the macro-financial conditions in the country around the time of initial intervention, we note a negative relationship with GDP growth, credit growth, and public debt. In countries where GDP growth, credit growth, and public debt were lower, the average intervention was higher. This is consistent with more severe macro-financial downturns being associated with larger initial interventions and governments with more ample fiscal room being able to provide more support to their financial institutions.

When we turn to the peak stakes, we find that high GDP growth and high financial stress tend to be associated with higher government support to banks. The first of these results may be due to reverse causality: where banks receive strong government support, adverse spillovers from the financial sector to the rest of the economy may remain limited. In other words, larger government interventions better shield growth. As for the latter result, if systemic risk keeps rising and remains elevated, further interventions may be needed to support individual financial institutions.

These findings suggest that the interventions in our sample were primarily driven by capital shortages in individual institutions at the beginning, whereas deteriorating macro-financial conditions played a role in later stages. A possible interpretation of these results is that supportive macroeconomic policies that rein in the decline in economic activity and efforts to restore confidence in the financial system (and ameliorate macro-financial stress) might limit the need to provide direct support to individual financial institutions.

Recall that the sample includes only those banks that experienced a government intervention. Therefore, the regression results should be interpreted as relationships observed conditional on a bank being intervened. A related concern is that the intervened banks may have different characteristics than a typical bank in a given country, considering that the government’s decision to intervene is not random. To address this sample selection bias, we run Heckman regressions using a larger sample including banks that were not intervened but were located in the countries covered in our sample. The results remain broadly the same.16

III. Remaining Public Asset Holdings in Financial Institutions

In many countries, public asset holdings in individual intervened banks remain significant even a decade after the crisis. This section focuses on these financial asset holdings remaining in public hands and the patterns of their divestment.

The speed and extent of the unwinding of public asset holdings varied widely across countries. Some countries, like the United States, recovered the funds provided for recapitalization and other support programs within a few years. Others, like Cyprus, have only liquidated insolvent banks after the end-2017 cutoff date of our dataset. This reflects in part the different ways in which the crisis started in various countries and the different ways in which it affected their macroeconomic circumstances, as well as the cross-country differences in crisis management and resolution frameworks. It may also reflect the different characteristics of the banks that were intervened.

To better understand these patterns, we construct current stocks of public holdings in individual banks by tracking the flows of asset purchases and sales in each bank by instrument from the time of the first intervention until end-2017. Because of data availability constraints, we are not able to examine public holdings of special purpose vehicles, impaired assets, or bad banks using our bank-level data (this is done at the country level in Section IV). We also cannot track impaired asset relief and the triggering of guarantees through time, because these data are not available at the bank level.

A. Remaining Asset Holdings in 2017

Public asset holdings in individual banks at end-2017 amount to US$ 135.3 billion, or 1.15 percent of GDP on average in the countries in our sample (Figure 3). This average, however, does not adequately reflect the considerable variation across countries.

The largest asset holdings relative to GDP can be found in Ukraine, where the government holdings amount to 7 percent of GDP following the nationalization of PrivatBank in December 2016; Luxembourg, with its holding of 34 percent of ordinary stock in BGL BNP Paribas (unchanged since 2009); Portugal given its ownership of Novo Banco—the good bank that emerged from the resolution of Banco Espirito Santo—and its capital injections in 2017 in Caixa Geral de Depósitos; and Greece, with its remaining stakes in the four large Greek banks (Piraeus, National Bank of Greece, Eurobank, and Alpha Bank). Germany and the Netherlands display a large outstanding asset holding of debt securities due to the novation of Sachsen LB’s commercial paper facilities of €17.1 billion and of Fortis Bank Nederland’s loan obligations of €16.1 billion.17

Overall, of the governments that intervened in their financial sectors, less than a third fully unwound their public stake positions by end-2017. Those are Austria, Bulgaria, Denmark, France, Latvia, Sweden, and Switzerland. Some of these public stakes were transferred to (special purpose vehicles inside) the general government, which we cannot track due to data availability. As such, our bank-level data may underestimate the actual remaining asset holdings on the balance sheets of governments.18

Of course, the timing of the crisis (including its aftershocks as well as the pattern of separate shocks hitting the economy and the financial sector) has not been uniform across countries and, consequently, neither has the timing of the interventions. Therefore, comparisons of remaining assets in public hands at a given point in time—at end-2017, as we do here—may be distorted by when a country was hit and when its government intervened. To address this, we replicate Figure 3 at the 5-year mark from the first intervention (Figure A2 in the Appendix). While the order of countries changes, the observation that divestment pace has been different across countries remains valid.

Looking at individual bank characteristics, we find that remaining public asset holdings are higher in banks with lower capitalization, profitability, and asset quality. The average direct intervention saw governments take a stake of 26 percent in financial institutions, of which an average of 2.6 percent of total bank equity remained at end-2017. Dividing the sample of banks by financial soundness measures, we see that the remaining public asset stake is higher for banks with lower capital adequacy, profitability, and asset quality (Figure 4). Stakes in these weaker banks may be harder to divest to the private sector. Interestingly, we find that the public asset stake is also lower in banks with lower liquidity, although this result does not hold in multivariate regression analysis.19

To further explore these patterns, we regress the remaining stake on bank characteristics and country macro-financial conditions, as well as bank and year
Stakebct=α+βXb,t1+γYc,t+InitalInterventionb,t+φb+δt+ϵbct.

The left-hand side variable is the government stake in bank b in country c in year t, measured as the winsorized total public holdings of equity, hybrid instruments, and debt divided by the bank’s total equity.20 Xis a vector of lagged bank characteristics (capitalization, liquidity, profitability, and asset quality in the previous period; as well as lagged size), 7 is a vector of macro-financial conditions (real GDP growth, credit growth, inflation, unemployment, public debt-to-GDP ratio, the monetary policy rate, and the financial stress index), Initiallntervention is the bank-specific initial intervention at time t (equal to zero for t<T and to the first intervention for t>T, where T is the year during which the first intervention took place in bank b), and φb and δt are bank and year fixed effects, respectively. Error terms are clustered at the country level.

The results suggest that, conditional on being intervened, better-capitalized banks and those with higher liquidity and profitability. see bigger declines in the stakes the government has taken in them (Table 5). There is also some indication that higher unemployment and lower public debt tend to be associated with a higher government stake.

Table 5.

Public Asset Holdings and Bank/Country Conditions

article image
Sources: National authorities; European Commission; bank reports; S&P Market Intelligence, IMF staff estimates.Note: This table shows the results of regressing the evolving government holdings in a bank on bank characteristics and country conditions. The government holdings and initial intervention are computed as the winsorized total public holdings of equity, hybrid instruments, and debt divided by the bank’s total equity. Capitalization is measured by Tier 1 ratio or, alternatively, by total capital ratio. Liquidity is measured by the ratio of liquid assets to total assets. Profitability is measured by return on assets or, alternatively, by net interest margin. Asset quality is measured by the ratio of problem loans to gross customer loans. All bank-level variables are lagged by one year. All regressions include bank and year fixed effects. Robust standard errors are clustered at the country level.

The correlation between remaining public holdings and bank characteristics is much stronger for smaller banks. We split the sample between big banks and smaller (i.e., small and medium-sized) banks at a threshold of $50 billion (Tables 6 and 7). We find that the coefficient estimates on capitalization, liquidity, and profitability are negative and significant for small and medium-sized banks, whereas for big banks the coefficient estimates are not significant, even though the exhibit the expected sign. The difference in the regression results for big and small banks is in line with big (systemic) banks receiving public support even when they are not facing capitalization issues, possibly because authorities act preemptively to prevent liquidity and profitability issues in these banks from leading to systemic distress. This interpretation is also in line with the evidence suggesting that the overall financial system stress level seems to matter more for the evolution of the public stake in big banks over time: a higher stake in big banks tends to be associated with higher levels of financial distress (Table 6). By contrast, it is credit growth, inflation, and policy rates that matter for the evolution of public stakes in small and medium-sized banks (Table 7).

Table 6.

Public Asset Holdings and Bank/Country Conditions: Big Banks

article image
Sources: National authorities; European Commission; bank reports; S&P Market Intelligence, IMF staff estimates.Note: This table shows the results of regressing the evolving government holdings in a bank on bank characteristics and country conditions. Big banks are those with more than $50 billion in total assets. The government holdings and initial intervention are computed as the winsorized total public holdings of equity, hybrid instruments, and debt divided by the bank’s total equity. Capitalization is measured by Tier 1 ratio or, alternatively, by total capital ratio. Liquidity is measured by the ratio of liquid assets to total assets. Profitability is measured by return on assets or, alternatively, by net interest margin. Asset quality is measured by the ratio of problem loans to gross customer loans. All bank-level variables are lagged by one year. All regressions include bank and year fixed effects. Robust standard errors are clustered at the country level.
Table 7.

Public Asset Holdings and Bank/Country Conditions: Small/Medium Banks

article image
Sources: National authorities; European Commission; bank reports; S&P Market Intelligence, IMF staff estimates.Note: This table shows the results of regressing the evolving government holdings in small and medium-sized banks on bank characteristics and country conditions. Small and medium-sized banks are those with less than $50 billion in total assets. The government holdings and initial intervention are computed as the winsorized total public holdings of equity, hybrid instruments, and debt divided by the bank’s total equity. Capitalization is measured by Tier 1 ratio or, alternatively, by total capital ratio. Liquidity is measured by the ratio of liquid assets to total assets. Profitability is measured by return on assets or, alternatively, by net interest margin. Asset quality is measured by the ratio of problem loans to gross customer loans. All bank-level variables are lagged by one year. All regressions include bank and year fixed effects. Robust standard errors are clustered at the country level.

B. Pace of Intervention, Recovery, and Instruments

Country experiences differed widely by date of intervention and speed of resolution. The scale of the interventions differed markedly—we group countries into four categories: large, medium, small, and minimal interventionists (Figure 5).21 But even within each of the groups, the speed of interventions and resolutions was different. For example, interventions in the United States, Denmark, and Ireland reached their peak level shortly after the start of interventions and gradually declined thereafter. In other countries, interventions started modestly but later increased in size.22

The difference may be attributable to the fact that some of these countries were hit twice: first by the GFC, and later by the euro area crisis and, in some cases, more idiosyncratic national crises. The patterns observed in Cyprus, Greece, Italy, and Portugal particularly fit this more complex narrative. The divestment or recovery of the interventions also follows different paths. In several countries, the government stake starts dwindling within a year after the initial intervention and is almost entirely unwound by the fourth or fifth year. For instance, in the United States, nearly all funds for recapitalization provided through the TARP were repaid as early as 2013. In other countries, divestment stops or slows down after a few years. As a result, substantial public stakes remain even after a decade. For instance, in the United Kingdom, some £20 billion remained outstanding at end-2017, primarily in the form of a 71 percent stake in Royal Bank of Scotland.

Slow recovery of provided support is associated with worse macroeconomic outcomes. We relate the divestment patterns underlying the remaining asset holdings to country-level macro-financial conditions. Notably, we see that relatively small unwinding of the government stake—defined as below-median recovery of assets as of 2017—is associated with lower private investment growth and lower bank credit growth (Figure 6), and to a lesser extent with lower overall GDP growth.23

Furthermore, in countries with slow recovery we also observe deterioration in financial access, depth, efficiency, and competition, while the improvement in financial stability is not as pronounced as in countries where the public stake has been reduced more swiftly (Figure 7). As before, these patterns do not prove causality.

Unwinding equity (and hybrid) stakes takes longer than unwinding debt instruments (Figure 8). This could simply be due to the nature of the instrument, with debt contracts having a well-defined maturity. It could also be a reflection of the challenge in finding the right time to put an acquired equity stake on the market. It is worth noting that the initial choice of the instrument is likely endogenous and could be indicative of the nature or severity of the problems in the intervened bank. For instance, authorities may believe equity stakes are needed because of deep-rooted managerial quality issues that require more time to fix.

IV. Other Aspects of Interventions: Impaired Assets and Indirect Costs

Country-level data from official sources provide complementary information on the fiscal costs associated with gross direct interventions and confirm our findings. The bank-level data in Sections II and III do not include all components of the impact of direct interventions on public finances. For instance, they do not capture the revenue and expenditure streams associated with government assets holdings. Moreover, while the bank-level dataset allows us to assess the remaining public holdings of individual financial institutions, it does not include public holdings of impaired assets, therefore potentially underestimating total public holdings of banking assets due to GFC interventions. To address these concerns, we turn to official data at the country level to complement the dataset developed in the earlier sections of this paper. These data are available on a consistent basis for a narrower set of countries, namely those in the European Union and the United States.

We collect this information from several sources. For the European Union countries, we examine Eurostat’s Excessive Deficit Procedure (EDP) Supplementary Tables and European System of Central Bank’s (ESCB) Financial Assistance Measures (FAM) Tables (as of April 2018). For the United States, detailed information is available on the TARP, but less is known on, for instance, the public asset holdings and revenue/expenditure streams resulting from the Treasury conservatorship of Fannie Mae and Freddie Mac. Therefore, the following sections present data solely on TARP.24

A. Current Asset Holdings Including Impaired Assets

An assessment of the remaining public asset holdings in the financial sector should include impaired assets that were transferred onto the general government balance sheet. Such transfers do not show in our bank-level dataset. 25 At the country level, however, aggregate data on the acquisition and disposal of impaired assets are available. Accordingly, a country-level approach is appropriate to investigate the overall impact of interventions and subsequent divestments on governments’ balance sheets.

The country-level data confirm the bank-level data for equity, debt, and hybrid instruments. (Figure A3A5 in the Appendix). In addition, the country-level data provide information on impaired assets that were purchased by the government and subsequently reclassified into general government balance sheets. For instance, the data reveal that Austria, Germany, and Slovenia still hold sizable impaired assets in excess of 4 percent of 2017 GDP (Figure 9). Including these distressed assets, total financial asset holdings that remain on government balance sheets are currently worth some $356 billion for European countries (Table 8, column D).26

Table 8.

Fiscal Impact of Government Interventions in the Financial Sector

article image
Sources: National authorities; ESCB; Eurostat; TARP; IMF staff estimates. Data vintage: April 2018.Note: [+] indicates a positive fiscal cost; [-] indicates a negative fiscal cost (gain). This table shows the gross direct interventions, the direct recovery, the net direct fiscal impact, the financial asset holdings of governments as of 2017, the indirect fiscal impact, and the total fiscal impact in current billion USDs [end-of-period]andasa [weighted average] percent of 2017 GDP in the full sample of 29 countries. It also shows these measures separately for the Eurozone, the United States, and the non-Eurozone EU in current billion USDs. Data are cumulative from the beginning of the GFC in 2007 until the latest available data atend-2017 and do not include forthcoming support or redemptions. Data reflect the available information as of April 2018 for EU countries and as of end-2018 for the United States.
Figure 9.
Figure 9.

Asset Holdings by Instrument

(2007–17; in percent of 2017 GDP)

Citation: IMF Working Papers 2019, 164; 10.5089/9781513508337.001.A001

Sources: National authorities; Eurostat; TARP and IMF staff estimates. Data vintage: April 2018.Note: This figure shows asset holdings by instrument in selected economies as of 2017, expressed as a percent of 2017 GDP. Instruments include equity and investment funds shares/units, debt securi ties, loans, and other assets. Data reflect the available information as of April 2018 for EU countries and as of end-2018 for the United States.

B. Fiscal Impact of Direct Interventions

Aggregate country-level data broadly confirm individual bank data on gross direct interventions and divestment. Even with the methodological difference in data compilation, the average difference in gross direct interventions between the two datasets is about half a percent of 2017 GDP (Appendix III).

The country-level data provide further interesting insights. First, recovery has been uneven across countries. Only a few governments have fully unwound their involvement in the financial sector through asset sales and loan repayments. Denmark, France, Hungary, Lithuania, and the Netherlands recovered more than 80 percent of the gross direct interventions cumulatively over 2007–17. In contrast, among the countries with large interventions, recovery stood well below 20 percent in Cyprus and Portugal over the same period.27,28

Second, the net direct fiscal impact—the difference between gross direct interventions and direct recovery—is just below $0.7 trillion (Table 8, column C), equivalent to some 2 percent of 2017 GDP. Net direct fiscal impact is the highest for Greece and Cyprus (Figure 10). After subtracting remaining asset holdings, the net fiscal impact drops to below 1 percent of 2017 GDP (Table 8, column E).

Figure 10.
Figure 10.

Recovery Rate

(2007–17; in percent of 2017 GDP and in percent on RHS)

Citation: IMF Working Papers 2019, 164; 10.5089/9781513508337.001.A001

Sources: National authorities; ECB; Eurostat; and IMF staff estimates. Data vintage: April 2018.Note: This figure shows the gross direct interventions, the direct recovery, the net direct fiscal impact [[+] indicates a positive fiscal cost; [-] indicates a negative fiscal cost (gain)], and the recovery rate in selected economies as of 2017. The first three measures are expressed as a percent of 2017 GDP. Recovery rate is the percent ratio of direct recovery [column B of Table A1 in Appendix II] to gross direct interventions [column A]. A higher ratio is associated with larger recovery of the government support provided to financial institutions. The recovery rate for Sweden is 297 percent and is not shown. Data reflect the available information as of April 2018 for EU countries and as of end-2018 for the United States.

Third, cumulatively over a decade, the net indirect benefits amounted on average to 0.2 percent of 2017 GDP (Table 8, column F). These benefits have resulted from higher revenue than expenditure streams from public asset holdings (ECB 2016). Such revenues include, for instance, received dividends and fees, while expenditures include interest payments on debt issued to finance the government’s support of financial institutions. For many governments the indirect fiscal impact has been positive in net terms (e.g., Greece and Denmark—see Figure 11), while others have incurred net costs over the last decade (e.g., Cyprus, Slovenia, and Portugal).29 Taking account of these indirect benefits lowers the total fiscal impact of interventions to some $250 billion or an average 0.7 percent of 2017 GDP (Table 8, column G).

Figure 11.
Figure 11.

Indirect Fiscal Impact of Government Interventions

(2007–17; in percent of 2017 GDP)

Citation: IMF Working Papers 2019, 164; 10.5089/9781513508337.001.A001

Sources: National authorities; Eurostat; ECB; IMF staff estimates. Data vintage: April 2018.Note: This figure shows the indirect fiscal impact of government interventions as a percent of 2017 GDP. Data is from column F of Table A1 in Appendix II. [+] indicate a positive fiscal cost; [-] indicates a negative fiscal cost [i.e., gain]. For details on the fiscal impact of financial interventions for Austria, please refer to Eurostat EDP tables and Holler and Reiss (2017). Data reflect the available information as of April 2018 for EU countries and as of end-2018 for the United States.

Putting all components (gross direct interventions, direct recovery, remaining asset holdings, and indirect impact) together, Figure 12 shows the total fiscal impact across our sample. The total impact varies widely across countries. It is near 20 percent of 2017 GDP in Greece and Cyprus, 12 percent in Slovenia, and 9 percent in Portugal. Other countries saw total costs of 5 percent of 2017 GDP or less, with 11 countries exhibiting total costs of below 1 percent of 2017 GDP or even small gains.30

Figure 12.
Figure 12.

Total Fiscal Impact of Government Interventions

(2017; in percent of GDP)

Citation: IMF Working Papers 2019, 164; 10.5089/9781513508337.001.A001

Sources: National authorities; Eurostat; and IMF staff estimates. Data vintage: April 2018.Note: This figure shows the total fiscal impact of government interventions as a percent of 2017 GDP. Data is from column G of Table A1 in Appendix II. [+] indicate a positive fiscal cost; [-] indicates a negative fiscal cost [i.e., gain]. For details on the fiscal impact of financial interventions for Austria, please refer to Eurostat EDP tables and Holler and Reiss [2017]. Data reflect the available information as of April 2018 for EU countries and as of end-2018 for the United States.

Note that our dataset and analyses have exclusively focused on direct government interventions and the stake the government has taken in banks as a result. In some cases, the size of government interventions was reduced by means of private sector burden sharing or bail-in (e.g., in Portugal and Slovenia; see Dell’Ariccia et al., 2018, for further information and references). The fiscal cost of public interventions would have been even larger in the absence of bail-ins in the cases where burden sharing has been achieved (e.g., converting to equity or writing off debt holders). This is particularly relevant for future crises, given the fact that the reformed resolution frameworks would resort more to such procedures to resolve distressed banks.

Linking Direct Interventions to Public Finances

The approach adopted in this paper (’approach A’) and summarized in Table 8 shows the build-up and unwinding of gross direct interventions. It takes stock of intervened financial assets remaining in government hands at end-2017 and assesses the fiscal impact on government finances at end-2017. This approach complements the conventional view on the impact of direct interventions on the general government budget balance and debt (’approach B’). Sparing some differences in statistical conventions, reclassifications, and valuation changes, this box aims to illustrate the differences and similarities of the two approaches.

Figure 1.1.
Figure 1.1.

Direct Interventions and Public Finances

Citation: IMF Working Papers 2019, 164; 10.5089/9781513508337.001.A001

Differences

  • Approach A records each intervention as a fiscal impact [A] and ‘traces’ the recovery [B] of direct support to assess the net fiscal impact.

  • Under approach B, each intervention that results in a transfer of cash to a financial institution— irrespective of its financing source—is recorded as an impact on government debt.

Similarities

  • The net acquisition of financial assets at end-2017 [D’] under approach B is equal to end-2017 asset holdings [D] under approach A.

  • The net direct and indirect fiscal impacts [C+F] under approach A is similar to cumulative impact on budget balances [G’] under approach B.

  • In both approaches, if the intervention is financed through means other than debt issuance (e.g., the use of cash balances or the sale of other assets), a correction is made in the memo items [H; I].

Figure 1.2 displays the impact of direct interventions on the general government debt at the peak of the interventions and at end-2017, based on data from the April 2018 EDP Supplementary Tables. The peak impact reveals that the largest debt increases—i.e., the largest financing needs—were recorded in Ireland, Greece, and Cyprus. In contrast, Sweden, Croatia, and France saw only marginal effects. Comparing peak impact with end-2017, we see that Ireland, the Netherlands, and the United Kingdom recorded more significant debt reductions. Other countries, such as Cyprus, Portugal, and Spain, have yet to see more than marginal decreases in their liabilities.

Figure 1.2.
Figure 1.2.

Impact of Direct Interventions on Government Liabilities

(2007–17; in percent of GDP)

Citation: IMF Working Papers 2019, 164; 10.5089/9781513508337.001.A001

Sources: National authorities, ESCB, Eurostat, and IMF staff estimates. Data vintage: April 2018.Note: This figure shows the maximum and current impact of direct interventions on government liabilities for selected economies, expressed as a percent of 2017 GDP. Data are taken at closing balance sheets. Data reflect the available information as of April 2018 for EU countries and as of end-2018 for the United States.

Fiscal Impact: Stock-Flow vs. Cash-Flow Approaches1/

The stock-flow approach adopted in this paper differs from cash-flow methods used, for instance, by Laeven and Valencia (2008, 2013, 2018). The main differences are threefold:

Asset holdings. Both approaches account for the total amount of public support provided through direct interventions. The stock-flow approach allows disentangling the price paid for the acquisition of the assets at the time of their purchase from capital transfers, when the price paid was above market value, whereas the cash-flow method does not distinguish the two. The stock-flow approach also accounts for valuation changes of equity holdings. The net direct fiscal impact under the stock-flow approach and the net fiscal cost under the cash-flow approach are conceptually computed in the same way. Both methods subtract from the gross fiscal costs any subsequent recoveries and asset sales and loan repayments.

Coverage. Both approaches cover interventions related to purchases of financial assets (equity, loans, impaired assets), exercised public guarantees, and debt assumption/cancellation. The methods differ mainly in terms of the coverage of other measures and country-specific interventions (see below). Moreover, the cash-flow approach includes operating costs of agencies or entities such as asset management companies as well as any other fiscal cash outlay directly attributable to the rescue of financial institutions. The stock-flow approach considers liquidity support to financial institutions and defeasance structures but does not necessarily include the operating costs of these structures if such costs are not reported in the EDP or FAM tables. Also, the stock-flow approach captures the repayment of liquidity support from defeasance structures to the government. Neither method accounts for post-intervention revenue and expenditure flows among and within government entities.

Timing. Our stock-flow approach examines the fiscal impact of direct financial interventions since the start of the GFC in 2007 and uses end-of-period (2017) exchange rates and GDP. In contrast, Laeven and Valencia consider cash flows in domestic currency, normalized by nominal GDP of the year in which the cash flow occurred.

While country-by-country details vary, the example below illustrates how the methodological differences affect the assessment of the fiscal impact of interventions for Greece. Total fiscal impact in the stock-flow approach is closest to the Laeven-Valencia net fiscal cost concept. The difference in this number between the two approaches amounts to some 2.4 percentage points of GDP (Table 2.1). The gross direct interventions and the Laeven-Valencia gross fiscal costs show a difference of 17.6 percentage point of GDP. The Spring 2012 bridge recapitalization loans that were converted into ordinary equity the following year explain most (80 percent) of this difference (Figure 2.1).2 The denominator effect accounts for 13 percent while different timing of transition recording and other factors explain the remaining 7 percent.

Figure 2.1.
Figure 2.1.

Greece: Differences between Gross Direct Interventions and Gross Fiscal Costs

(in ppt of GDP)

Citation: IMF Working Papers 2019, 164; 10.5089/9781513508337.001.A001

Table 2.1.

Fiscal Impact of Direct Interventions in Greece: Stock-Flow vs. Cash-Flow Approaches

article image
Sources: National authorities; ESCB; Eurostat; IMF staff estimates.
1/ Prepared with input from Fabian Valencia.2/ To ensure the consistent treatment of interventions between the financial accounts and EDP supplementary tables, the Greek recapitalizations of viable banks in 2012 and 2013 have been treated as one transaction since April 2019. A similar treatment has been adopted by Laeven and Valencia.

V. Conclusions

This paper presents a new dataset on public interventions in the financial sector since the global financial crisis. Through these data, we track both gross interventions and recovery in over 1,100 individual financial institutions across 37 countries. The dataset is validated against aggregate country level data. As the latter include impaired assets on government balance sheets and revenue and expenditure streams from public asset holdings, we are able to assess the total fiscal impact of public interventions in the financial sector.

This effort contributes to greater transparency in recording the fiscal implications of financial sector support. Nevertheless, data availability and transparency remain issues in many countries. Data are often not easily accessible and inconsistent across countries, or, in some cases remain confidential even a decade after the onset of the crisis. Such practices hinder the evaluation of crisis intervention and resolution measures. We hope this paper will advance the discussion on data availability, transparency, and accountability.

Going forward, we aim to build on these datasets to provide more in-depth analysis of public interventions. Some interesting questions we plan to examine revolve around the interaction between bank size and government interventions, the macro-financial environment’s effect on recovery and divestment rates, the factors underlying the choice of deploying different instruments in asset purchases, and the long-term consequences of government interventions in the financial sector including on growth, stability, and market structure.

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Appendix I. Constructing the Bank-Level Dataset

Methodological Challenges

The collection of these data on divestment and remaining public stakes is challenging. First, numerous banks that existed in 2007 ceased operations during the crisis. Some banks were acquired by governments (e.g., Heritable Bank plc), some were sold to other financial institutions (e.g., Banco de Valencia), and some were split into a good bank and a bad bank (e.g., Parex Banka). In these cases, we track the gross interventions until the formal announcement of the cease of operations. If public information on the unwinding of support is unavailable, we assume no direct recovery of this support and accumulate it until the formal announcement date. These cases are further complicated if the gross financial support received by the failing bank had still not been fully repaid at the time of the resolution and was subsequently transferred to the acquiring entity. If the latter is a public entity, we cease tracking the repayment of the intervention as such a repayment would then occur between governmental entities. For instance, this is the case of Bradford & Bingley, which was transferred to UK Asset Resolution Limited in October 2010. If the acquiring entity is private, we track the public stake holding until its repayment. This is the case of Banca Cívica Group, for instance, when it was acquired by Caixabank in March 2012.

Second, the treatment of some interventions in banks’ annual reports is not straightforward to decipher. For instance, Allied Irish Bank received a capital contribution of €6.1 billion on July 28, 2011—but merely a single line of the bank’s 457-page 2011 annual report alludes to the fact that this is a capital contribution, in noting that the authorities have no “entitlement to seek repayment of these capital contributions.” Furthermore, the accounting treatment of equity recapitalizations differs across banks. While most banks recorded a corresponding increase in the bank’s share capital, some banks split the recapitalization between the share capital and the share premium. Our recording of these interventions necessitated dealing with these peculiarities consistently across all 1,114 financial institutions.

Third, the ownership structures of public entities complicate our analysis. In some cases, the state became a direct stakeholder. In other cases, state-controlled entities were used. For instance, in September 2008, the Belgian authorities recapitalized Dexia not only directly, but also indirectly by contributing capital through three public-owned entities: Holding Communal SA, Acrofin SCRL, and Ethias. Similarly, whereas the direct French intervention into Dexia was managed by the Agence des Participations de l’Etat, the French authorities also contributed capital indirectly through the Caisse des Dépôts et Consignation and CNP Assurances. Similarly, the Irish authorities recapitalized their banking sector in part through the National Pensions Reserve Fund Commission. Tracking public holdings across time, therefore, requires careful consideration of all the shareholders of a bank, as public interventions might be channeled through entities other than treasury departments or finance ministries.

Case-by-Case Summaries

Australia

Australian banks did not receive any outright public intervention in the aftermath of the crisis. The authorities supported the financial system by introducing a retail deposit insurance scheme, guaranteeing wholesale bank debt issuance, and purchasing portfolios of residential mortgage-backed securities from Australian lenders. The Reserve Bank also supported the financial system’s liquidity by expanding the range of securities that qualified as eligible collateral for open-market operations to include bank debt and AAA-rated tranches of securitizations. In addition, the authorities employed both monetary and fiscal policy to support the economy.

Austria

The Austrian sample covers Hypo Group Alpe Adria, Raiffeisen Zentralbank Österreich, Landes-Hypothekenbank Steiermark, Hypo Tirol, Österreichische Volksbanken, BAWAG, and Kommunalkredit.

The Austrian authorities first recapitalized Hypo Group Alpe Adria (HGAA) in December 2008 with €900 million in Partizipationskapital, a form of preference shares. They then nationalized the bank on December 23, 2009, triggering in the process several aid measures: €450 million in equity and €1,450 million in guarantees by the federal authorities. The bank also received another €200 million in Partizipationskapital, a €20,700 million guarantee, and a €200 million in liquidity facilities by the state of Carinthia. Note that we do not include the latter in our dataset. These measures automatically led to the restructuring of HGAA per the European Commission’s guidelines on public recapitalizations of financial institutions. The authorities also enacted a guarantee of HGAA’s assets of €200 million in December 2010 given additional asset write-downs and recapitalized HGAA with €500 million to allow it to meet its regulatory requirements in December 2012. After multiple rounds of negotiations between the Austrian authorities and the European Commission that lasted from July 2010 to August 2013, the original restructuring plan morphed into a liquidation plan under which HGAA would be wound down in an orderly manner, and its performing assets sold when possible. Accordingly, these assets were split among HGAA’s regional subsidiaries in the Balkans and Italy, which currently operate as Hypo Group Alpe Adria A.G. and HBI-Bundesholding A.G. respectively. Simultaneously, HGAA was guaranteed with €9,700 million in total during this process, and its toxic assets were transferred to a winding-down public entity, HETA. As of end-2017, HETA still had a portfolio of about €6,400 million.

The Austrian authorities also recapitalized Raiffeisen Zentralbank Österreich (RZB) in July 2009 with a non-controlling equity participation of €1,750 million, which the bank paid back in June 2014. Note that RZB merged with Raiffeisen Bank International AG (RBI) in March 2017, so the former bank’s annual reports are listed on the latter bank’s website.

The Austrian authorities also intervened in Landes-Hypothekenbank Steiermark (Hypo Steiermark), Hypo Tirol, and Österreichische Volksbanken (ÖVAG). The European Commission ruled that the intervention into the first bank does not constitute State aid, so we exclude it from our dataset. The second bank’s intervention was in the form of equity of €220 million in April 2012, repaid back in 2013. The bank had also been granted a guarantee of €100 million in 2009. The third entity is an association of banks and was recapitalized twice: € 1,000 million in 2009 and €250 million in 2012. The association was also guaranteed with €100 million in 2008 and €3,000 million in 2012. Given its severe liquidity problems, however, the association underwent a voluntary liquidation in 2015, through which it was demerged, some of its assets sold to other banking entities, and its impaired assets transferred to Immigon, a public winding-down company.

BAWAG was recapitalized with Partizipationskapital of €550 million, fully paid back by 2014, and guaranteed with €400 million in December 2009. The bank remains in operation today. Erste Group, which also remains in operation today, was recapitalized in 2009 jointly by the Republic of Austria with Partizipationskapital of €1.224 billion and by private investors. The Group fully redeemed the Partizipationskapital on August 8th, 2013.

Kommunalkredit (KA) was nationalized on November 3, 2008 with the authorities’ purchase of 99.78 percent of the bank from ÖVAG and Dexia Credit Local (DCL) for €1 each (the other shareholder of KA was the Austrian Communes Association which retained its stake following the nationalization). This nationalization entailed converting non-collateralized claims of ÖVAG (€172.5 million) and DCL (€200 million) into Partizipationskapital, boosting therefore KA’s regulatory ratios. This nationalization also entailed a restructuring plan for KA, which was finalized in March 2011 after multiple rounds of negotiations. In the process, KA’s nonperforming assets remained in the bank, now renamed as Kommunalkredit Finanz AG under State ownership, whereas performing assets were transferred to a new bank, Kommunalkredit Austria AG (KA Neu). KA Finanz received €1,000 million in non-refundable loans, while KA Neu was recapitalized with €250 million in ordinary shares and €441 in impaired asset relief. KA’s guarantees, which amounted to €10,800 million, were transferred to KA Finanz. The latter was further guaranteed with €1,200 million on impaired assets and €3,000 million on commercial paper. Note that €25 million of KA Neu’s recapitalization was treated as non-repayable. As to the remaining amount, it was repaid back in 2015 with KA Neu’s privatization. The government’s holding of the bank (99.78 percent, equivalent to the remaining recapitalization of €225 million) was sold to Gesona, the current majority shareholder of the bank. The remaining public ownership of KA remains at a miniscule 0.22 percent with the Association of Austrian municipalities.

Belgium

The Belgian authorities intervened in several cross-border banks, which are detailed separately at the end of this appendix. Those banks include Dexia (and Belfius) and Fortis Bank (and Fortis BGL). The Belgian authorities also intervened in KBC and Ethias. In the case of Kaupthing Bank Luxembourg, Belgium and Luxembourg intervened jointly. Sources on the Belgian government’s complex interventions in financial institutions include the IMF Financial System Stability Assessment reports,31 the European Commission, public letters between the Belgian National Accounts Institute and Eurostat (the National Accounts Institute being the Belgian governmental body responsible for reporting government finance statistics), bank investor presentations, press releases and annual reports, and other sources.32

The Belgian authorities and the Flemish Region recapitalized KBC in December 2008 and February 2009, respectively, with €3,500 million in hybrid instruments each, which were fully paid back by 2015. KBC was also placed under a €20 billion guarantee in May 2009.

Ethias was jointly recapitalized by the Belgian authorities and the Flemish and Walloon Regions with €1,500 million in the form of preference shares in 2008 and €278 million in the form of debt instruments in 2011.

Brazil

Akin to the Australian response to the crisis, the Brazilian authorities did not directly intervene in any banks. Instead, the Brazilian central bank cut interest rates, established credit facilities in foreign currency (including repurchase agreements and specific lines to exporters), reduced reserve requirements, and sold swap contracts to ease pressure on the domestic currency.

Bulgaria

The Bulgarian authorities extended a loan of BGN 1,200 million to First Investment Bank (FIB) in June 2014. The authorities extended BGN 900 million of the loan to the bank again in November 2014. That same month, FIB repaid BGN 300 million of the loan, followed by BGN 450 million in 2015 and BGN 450 million in 2016. As of 2017, BGN 900 million remained outstanding.

Canada

Given the heavy exposure of Canadian banks to the housing market, they faced significant liquidity problems at the onset of the crisis. In response to funding shortages, Canadian authorities intervened in two main ways to ease market pressures on the banking system: they bought mortgages from banks and provided any troubled institutions with temporary liquidity assistance. Accordingly, in addition to some Canadian banks’ access to the Federal Reserve’s liquidity programs, the Bank of Canada implemented several facilities starting 2008 such as the Term Loan Facility. Furthermore, through the Insured Mortgage Purchase Program (IMPP) enacted by the Canada Mortgage and Housing Corporation, Canadian banks could securitize insured residential mortgage loans by creating mortgage-backed securities and selling some of those securities to the Canada Mortgage and Housing Corporations in governmental auctions until March 2010, shedding thereby some of these risky assets from their balance sheets and onto the government’s. For instance, under this program, Scotia Bank is estimated to have received up to CAD 9 billion in public aid. Note, however, that Canadian authorities have not released any bank-level information on aid disbursed through the IMPP, and bank annual reports confound any such estimations by embedding these securities’ sales in other financial information, preventing a straightforward calculation of the associated risks borne by the authorities.

Croatia

The Croatian authorities recapitalized Croatia Banka, a public bank, in October 2012 with HRK 200 million in equity. They also recapitalized Hrvatska Poštanska Banka, the largest Croatian-owned bank in the country, in multiple interventions. Starting in 2009, the bank issued a hybrid instrument of HRK 250 million to several state companies, HRK 50 million of which was converted into equity in 2010. This conversion was accompanied by another recapitalization in 2010 for HRK 450 million in equity. With the government’s stake in the bank at 99 percent, these capital-strengthening measures did not increase the public holding of ordinary stock, but they did increase the bank’s total equity. The remaining hybrid instrument was converted in June 2015. New equity was again issued in September 2015 to both public and private investors. The private share of new issuance was HRK 305.9 million, while the public share was HRK 244.1 million. This boosted the bank’s capital but reduced the public holding of common stock to 72 percent, where it still currently stands.

Cyprus

The Cypriot banking system was hit hard by the crisis and several interventions took place.

In May 2012, the Cypriot authorities recapitalized Cyprus Popular Bank (CPB) with €1,800 million, which increased the government’s holding of ordinary stock to 84 percent. Following the EU-IMF program agreement in March 2013, CPB’s assets were transferred to the Bank of Cyprus (BoC), which was then recapitalized with bail-in measures, such as converting uninsured deposits and additional equity contributions.

The Cypriot authorities also recapitalized Cooperative Central Bank Ltd (CCB). The latter received two capital injections in the form of ordinary shares, first in February 2014 for €1,500 million, then in December 2015 for €175 million. CCB became effectively nationalized as the government’s holding of common equity increased to 99 percent. However, the CCB faced an accelerated deposit outflows in 2018 and Cypriot authorities placed €3.19 billion bonds and €351 million deposits at CCB to strengthen its balance sheet and facilitate its sale. In September 2018, the assets (primarily performing loans and sovereign bonds) and all customer deposits of the CCB were sold to Hellenic Bank, leaving the bulk of the nonperforming loans in a residual entity, which has evolved into a government-owned asset management company.

Czech Republic

The Czech banking system weathered the crisis well which eliminated the need for taking any public stake in individual institutions.33

Denmark

The Danish banking sector was hit hard by the crisis. By accounts of the Danish Financial Crisis Committee, more than a third of the sector disappeared after the crisis.34 To process all the resolutions and liquidations, the Danish authorities set up in October 2008 a resolution authority, Finansiel Stabilitet, to manage the banking sector’s restructuring. The authorities also introduced five bank packages in the span of four years: the Stability Package in October 2008, the Credit Package in January 2009, the Exit/Resolution Package in June 2010, the Consolidation Package in September 2011, and the Development Package in March 2012. By estimates from its 2014 annual report, Finansiel Stabilitet took over asset portfolios from failing banks of nearly DKK 100 billion since 2008. Of those in which the authorities intervened, we cover EBH Bank, Roskilde Bank, Fionia Bank, Nova Bank Fyn, Eik Banki, Eik Bank Danmark, Amargerbanken, Fjordbank Mors, Max Bank, FIH Erhvervsbank (FIH), Capinordic Bank, Løkken Sparekasse, Gudme Raaschou Bank, Sparebank Østjylland, Danske Bank, Vestjysk Bank, and Aarhus Lokalbank. Of the banks taken over by Finansiel Stabilitet under the bank packages, EBH Bank was taken over on November 21, 2008; Løkken Sparekasse on March 2, 2009; Gudme Raaschou bank on April 16, 2009; Fionia Bank on May 28, 2009; Eik Banki and Eik Bank Darnmark on September 30, 2010; Amagerbanken on February 6, 2011; Fjordbank Mors on June 24, 2011; Max Bank on October 8, 2011, and Sparkassen Østjylland on April 21, 2012. Our sources include Finansiel Stabilitet’s annual reports and press releases, the European Commission, Danmarks Nationalbank’s reports and accounts, Rigsrevisionen (the national Danish audit agency)’s report to the Danish Public Accounts Committee, and the IMF Financial Sector Assessment Program reports.

EBH Bank received the first recapitalization from Finansiel Stabilitet in November 2008 with DKK 1,000 million, followed by DKK 2,400 million in the same month and DKK 2,000 million in January 2009. The bank was also financed by debt instruments in 2010 for a total DKK 207 million.

Roskilde Bank, despite having been Denmark’s eighth largest bank, sought State aid as early as July 2008 when it was granted an unlimited liquidity facility and an unlimited guarantee on this facility. This measure, however, failed to shore up the capital base of the bank, which was subsequently taken over by the Danish central bank in March 2009 and later transferred to Finansiel Stabilitet. As part of the liquidation process, the bank received DKK 1,720 million in Tier 1 capital, DKK 2,000 million in Tier 2 capital and DKK 36,800 million as a senior loan to repay the bank’s debt obligations. The bank also obtained share capital of DKK 11,423 million and a subordinated loan of DKK 1,000 million.

Fionia Bank faced large write-downs starting in 2008 due its heavy exposure to the real estate market. The Danish authorities intervened in the bank with a credit facility of DKK 5,100 million and a restructuring plan to carve out the impaired assets and return the bank to profitability. The restructuring process entailed splitting the bank into two entities: Old Fionia, which solely contained equity and subordinated debt, and New Fionia, which contained everything else. New Fionia would then take over the activities of Fionia Bank and continue serving its customers. By mid-2009, however, the Danish authorities ascertained that Fionia’s restructuring could no longer be viable as the write-downs were larger than originally anticipated. The bank, including New Fionia, would have to be liquidated. Accordingly, New Fionia was then split into a red part (Nova Bank Fyn) which solely contained customers with high risk exposure and possible future impairments, and the