We proceed as follows. Section 2 discusses the data, and Section describes 3 the identification strategy, and the main results. Section 4 explores the roles of transparency and charter values, and we also examine how interventions correlate with the presence of zombie banks. Section 5 reports on the effect of interventions on consumer welfare. Section 6 offers concluding remarks.

# **2. Data and overview of policy responses to banking crises**

Data for 41 banking crises are obtained from Laeven and Valencia (2008, 2010, 2012) for the period 1996-2010. Of those crises, 29 are classified as systemic crises and 12 are episodes of borderline crises.<sup>5</sup> A country is classified as having a crisis if the banking system exhibited signs of stress (bank runs, losses, and liquidations) and, additionally, if significant interventions can be observed. Interventions are considered significant if significant guarantees, liquidity support (5% of deposits and liabilities to nonresidents), recapitalizations with public funds (exceeding 3% of GDP), and significant nationalizations took place. The information for the policy responses is taken from Laeven and Valencia (2010, 2012). Appendix I presents details.<sup>6</sup> Crises responses consist of an initial phase concerned with containing liquidity strain, protecting liabilities, and limiting effects from fire sales. The containment phase results in wide-ranging liquidity support, and guarantees on banks’ liabilities, and, less frequently deposit freezes and bank holidays. Subsequently, balance sheet restructuring takes center stage: banks are resolved, recapitalized, nationalized, and unviable ones exit the market. While deposit freezes and bank holidays are short-lived with no prediction as to how they affect competition, other policy responses translate into precise predictions. We constrain our analysis to interventions where theory offers clear indications for competition: blanket guarantees, liquidity support, recapitalizations, and nationalizations.

The common theme that links these different manifestations of bailouts is moral hazard. The idea that bailouts are a source of risk-shifting opportunities is undisputed (Farhi and Tirole (2012)). The literature casts the effects of bailouts in terms of their effect on risk-taking. However, since Keeley (1990) has shown that competition drives bank’s risk-taking, the ideas put forward in this literature also apply in the context of our study. Acharya (2011) argues similarly. He shows that short-termist governments - thanks to the opaqueness of their balance sheet - exploit moral hazard opportunities in the financial system to boost activity and ignore the risks associated with these actions. Either by extending guarantees or promoting risky lending, the government allows competition at the expense of

> 5 Laeven and Valencia (2010) do not offer a definition for borderline cases. They classify countries that “ _almost met_ ” the definition of a systemic crisis as borderline cases.

> 6  G overnments also engage in other interventions, e.g., deposit freezes and bank holidays. As we discuss below, these measures do not translate into predictions for competitive effects.

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