Nº 20-101: The Impact of Policy Interventions on Systemic Risk across Banks

What is the impact of policy interventions on the systemic risk of banks? To answer this question, we analyze a comprehensive sample that combines bank-specific bailout events with balance sheets of key affected and non-affected European banks between 2008 and 2014. We find that guarantees reduce the systemic risk contribution made by small banks in the short run and by small or less liquid banks in the long run. Recapitalizations immediately decrease banks’ systemic importance, but the effect is also short-lived. Liquidity injections may even significantly increase systemic risk especially when administered to the less capitalized or highly profitable banks.