Effect of Government Bailouts on the Bank Performance and Risk Taking within Bailed out Banks

Abstract

During the global financial crisis, several banks all over the world were distressed due to the negative effects of the crisis. In order to mitigate the systemic risk, governments were under severe pressure to intervene in the financial industry in the form of government bailouts. However, these massive government bailout programmes created the debate whether the aftermath effects are positive or negative to the financial system. This paper focuses on finding the effects of government bailouts on the bailed out banks in terms of performance and risk taking during the post bailout period. It is found that government bailout has a significant negative impact on performance, while there is a significant positive relationship between bailout capital and the bank risk taking during the post bailout period.