# **1 Introduction**

Governments deploy bank bailouts to mitigate risks of financial instability and reduce the likelihood or severity of recessions that systemic bank distresses and failures often trigger. Bailouts may mitigate financial disintermediation shocks, uphold credit supply, and maintain economic conditions by reducing corporate and personal bankruptcies, and thus unemployment. But they have social and fiscal costs. Financial support to distressed banks may impose large redistribution costs on society when taxpayers are not adequately compensated for the risks the government takes or for the funds that bank owners never return (Dell’Ariccia et al. 2022).<sup>b</sup> Government intervention can help bankers socialize losses and privatize profits. Past bailouts also raise the expectations of future bailouts and generate fiscal contingent liabilities. They can feed the moral hazard incentives of banks, reduce market discipline, and impact the competitive landscape in banking (Calderon and Schaeck, 2016; Gropp et al., 2011). Ultimately, rescuing distressed banks can distort the allocation of savings/capital in the economy because they could be partially allocated based on the political and regulatory connections of banks. Bailouts can also decrease confidence in banks and be politically unpopular, including because they are perceived by the citizens as unfair (Berger and Roman, 2017), and can sometimes lead to sovereign debt problems or even civil unrest (Berger and Roman, 2020).

This paper studies the link between bailouts and bank size, ownership, and financial soundness, using bank-level data from Kazakhstan from 2009 to 2021. Kazakhstan is a particularly interesting country for this type of analysis because of repeated bouts of financial instability and the staggered bank bailouts involving several types of public interventions. The country has experienced two waves of financial crises since 2008 because of commodity price shocks, economic concentration in extractive industries, and weak governance, among other challenges. The economic crisis triggered by COVID-19 also renewed pressure on banks and the banking system. From 2009 to 2021, the banking system comprised between 26 and 40 operating banks and witnessed 41 bank instabilities declared by the bank supervisor.<sup>c</sup> Out of these cases of financial distress, 23 were resolved through bank bailouts using public money. The bailouts were staggered over time and used different instruments (equity injection, debt or deposit funding, and purchases of non-performing loans in most cases at 100 percent of the nominal [gross balance sheet] value).<sup>d</sup> The cost of bailouts thus varied widely.

Kazakhstan is more than an interesting case study. As a country at a higher level of economic development compared with its regional peers, it can provide useful empirical evidence

> b Dell’Ariccia et al. 2022 show that divestiture takes a long time and recouping the full cost can be questioned including because of alternative costs such as forgone investment in education or health care.

> c During 2009-2021, there were 24 banks with instabilities and 41 actions to tackle the instabilities. Twelve banks were terminated with license withdrawal, including two banks that have been transformed into non-banks, and 10 banks liquidated or are in the process of liquidation. Data sources for bank instabilities resolved with bailout actions are described in section 4.1.

> d Just in one case, the price paid to acquire non-performing loans was lower than the full nominal value: the purchase from a non-bank entity (transaction value of KZT 2.6 tln in 2017). The purchase was at about a 50% discount to the - - gross value according to the Kazakh Ministry of Finance statement: (https://informburo.kz/novosti/fond <u>problemnyh kreditov-pereplatil-za-aktivy-bta-23-trln-tenge-v-minfine-razyasnili-situaciyu.html).</u>

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