Dety Nurfadilah / The Impact of Bailout on Financial Performance And Risk-Taking During : A Critical Systematic Review / 7- 13

INTERNATIONAL JOURNAL OF e-ISSN: 2622-4585 | p-ISSN: 2580-0132 ipmi BUSINESS STUDIES Vol. 3 | No. 1 (February 2019)

The Impact of Bailout on Financial Performance And Bank Risk-Taking During Financial Crisis: A Critical Systematic Review

Dety Nurfadilah¹* ¹Faculty of Economics, Universitas Krisnadwipayana, Jakarta 13077, Indonesia

A B S T R A C T A R T I C L E I N F O

The focus on the bank bailout has been increased since the global Keywords: inancial crisis in 2008 in most countries. However, previous studies Bailout, often discover the relationship between bailout and corporate Financial Crisis, governance. In this study, bank bailout literature will be reviewed Systematic Review, with the focus on the impact of bailout on bank inancial Bank Risk-Taking, performance and bank risk-taking during the inancial crisis. Financial Performance Multi-step strategy is used to collect the data from 2000 to 2016. From the 7 papers were chosen based on the criteria. This systematic review has shown that the bank bailout has a positive impact on inancial performance, however, it has a negative impact on bank risk-taking for a longer period.

*Corresponding Author E-mail: © 2019 IJBS, All rights reserved. [email protected]

Copyright © 2019 Authors. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

INTRODUCTION The global inancial crisis in 2007-2009 has hit Currently, 465 failed in United States closed the real economy of the whole world. According by the Federal Corporation to Dhameja (2010), this crisis is worse than the (FDIC) from the Initial crisis in 2008 to 2012, great depression crisis in the 1930s. This crisis is namely New Century, American Home Mortgage, spreading to the entire global inancial system. Netbank, , and Freddie Financial crisis triggers economic consequences Mac, Lynch, Lehman Brother, Washington of inlation, unemployment, drop in purchasing Mutual, American International Group, HSBC power and increases public doubt about its ability Finance Corporation, and so forth so on (Andrews to provide service. The global inancial crisis led et al, 2016; Karnitschnig et al, 2014; Ivashina & to a bank collapsed in the inancial sectors of Scharfstein, 2009). In Europe and Central Asia several important developed countries (Barth et region, the inancial crisis has caused the bank al., 2012). collapsed, namely Glitnir, Kaupthing and - 7 - International Journal of Business Studies Vol. 3 No. 1 ( February 2019)

Landsbanki in Iceland; , CatalunyaCaixa, aid on bank crisis performance and its risk-taking. CajaSur in Spain; Parex Bank in Latvia; UBS in Switzerland; and BNP Paribas in Belgian To the best of author's knowledge, this is the irst and Luxembourg; Bank of Antigua in Eastern study to create a comprehensive systematic review Caribbean; Banco Privado Portugues in Portugal; on this issue. To date, the existing studies have Anglo Irish Bank in Ireland; BTA bank and Alliance examined the effect of bailout on bank future bank in Kazakhstan and so forth so on (White, behavior (Fisher et al., 2012; Dam and Koetter, 2008; Mclaughlin & Levring, 2008). In the Asia 2012; Gropp et al., 2011), impact of capital Paciic region, it caused the collapse of Lehman injections (Duchin and Sosyura, 2013; Berger et al. brothers in Japan and Bank West in Australia (2011); Mehran and Thakor (2011). A critical (KyodoNews, 2008; Kramer & Andrews, 2009). review of the literature was conducted to address According to Terazi and Şenel (2011), an the following question: what is the impact of unprecedentedly large number of failed banks has bailout on bank performance during the inancial increased the government attention to enacted crisis? And what is the impact of bailout on bank a range of rescue plans to help banks restore its risk-taking during the inancial crisis? health and conidence, as well as increase its inancial stability. In 2007, The US This study is organized as follows: section 1 present offered a loan to several banks and made more the background of the study, section 2 describe funding available around $20bn, then European research methodology, section 3 state the result, Central Bank offered $500bn to assist commercial section 4 discuss the result, section 5 describes the banks. In 2008, United States launched Troubled limitations, and section 6 concludes the study. Asset Relief Program (TARP) with the total fund given around $700bn (Guillén, 2009), while British RESEARCH METHOD Government launched a bank rescue package Design with approximately $850 billion. According to Systematic review and narrative are used in this the International Monetary Fund (2010), Latvia study to present a critical overview of the research in the Baltic States suffered from the crisis and topic and evaluate the quality of the previous urged to ask for inancial support. The government studies (Ressing et al., 2009). A systematic review support continues until this day. In 2016, Italy is one type of literature review that collect and government approve to give fund around €20bn summarize all studies based on criteria (Khan et to support Monte Dei Paschi di Siena (BBC, 2016). al., 2003). This systematic reviews aimed to systematically examine the scientiic literature However, previous researchers argue that bailout to understand the impact of bailout on bank is making the bank worse in many ways. It performance and bank risk-taking. increases the bank risk-taking, volatility, and default risk, and create a problem Search Strategy (Duchin and Sosyura, 2014). Unfortunately, this To achieve the research objectives, multiple-step issue is often ignored by the government and other search strategy was adopted from the previous inancial aid bodies because they are focusing study in the ield of inancial institution on “ institution” mindset. Also, the cost (International Finance Corporation, 2013), nurse of the bailout is very expensive. Every decision services (Carter and Chochinov, 2007; Jennings et made by the government will have consequences al., 2015), and construction management (Hong et on bank performance. Gerhardt and Vennet al, 2012; Yi and Wang, 2013; Osei-Kyei and Chan, (2016) added that the massive bailout program 2015). The two-step review was used to get has increased the question about the effect on a high-quality paper. At the irst stage, the authors government intervention on future bank behavior. created a list of thematic ield group about the Therefore, there is an increasing need to bailout. At the second stage, this list was narrowed understand the impact of government inancial down to sub-theme focusing on the impact on bank - 8 - Dety Nurfadilah / The Impact of Bailout on Financial Performance And Bank Risk-Taking During Financial Crisis: A Critical Systematic Review / 7- 13

performance and bank risk-taking (ig.1). In this study, a range of academic research database is used to collect the data such as SSRN A comprehensive search was carried out under website, Emerald Insight, Science Direct, Proquest, the “abstract / title / keywords”. The search Springerlink, business EBSCOHOST, and google keywords include “bailout inancial crisis”, scholar. Science Direct and Emerald Insight have “government support inancial crisis”, “bailout been considered as a database that performed corporate governance”, “bank bailout”, “bank better than another database website (Falagas performance in inancial crisis”, “bailout bank risk”, et al, 2008; Ke et al., 2009; Yuan and Shen, 2011; “bank risk-taking bailout”. In addition, the search Osei-Kyei and Chan, 2015). was restricted to the ield of study “accounting and inance”, “business, management, and Inclusion and Exclusion Criteria accounting”, “economics, econometrics, and According to Meline (2006), the process of inance”, “social science”. The third step, keywords systematic review consists of predetermined were combined using AND and OR. The full search criteria which are included and excluded from code is listed as follows: the research. Chambers (2004) added that studies are excluded from the collection of ABS-TITLE-KEY (“bailout” OR “inancial crisis” OR literature if they meet the following criteria: (1) “bank performance” OR government support” OR deinitely meet one or more of exclusion criteria, “bank bailout” OR impact bailout) AND ABS-TITLE- (2) contain ambiguous methods, (3) does not KEY (bank crisis performance” OR “bank risk- contain suficient data or statistics, or (4) does taking” OR “effect bailout”) AND SUBJAREA (busi not meet the predetermined criteria for quality. OR manag OR Acc OR econ OR soci) AND To achieve the goal of this research, several PUBYEAR N 2000 AND PUBYEAR b 2017 AND inclusion and exclusion criteria are as follows: LANGUAGE (“English”) AND SRCTYPE (j).

Table 1. Inclusion and Exclusion Criteria

Abstract Select website Hand-search Inclusion Criteria: identiied and and links retrieved screened explored documents (I) Published articles relevant to the impact of bank bailout 568 65 17 on bank-risk taking and inancial performance during inancial crisis. (ii) Articles published from 2006 to 2017. (iii) The article types are journals, books, literature review, Irrelevant Documents conceptual study, empirical study. articles or with Irrelevant judged unrelated scope sites appropriate (iv) Articles are written in English. 328 39 6 (v) Exploring impact of bailout on bank performance and bank risk-taking. (vi) All countries which suffered from inancial crisis.

Studies not Website and (vii) Literature focusing on any types of bailout: government, meeting links all inancial authority, IMF, and etc. inclusion criteria selection criteria 17 12 Inclusion Criteria:

(I) Papers in non-English language and without English translation. Articles (ii) Magazine, newspaper, or blog which are not based on included in Documents included theoretical or empirical study. the review in the review (iii) Literature focusing on non-default bank. 4 7

Figure 1. Flow of Research

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RESULT Overview of Search Results Table 2. Included study objectives and measurements

Key focus/ Author & Year Aims Data Collection Participants statement of Outcome Methods problem

Gerhardt and Investigate the Multivariate logit 114 Banks in Limited literature Equity ratio, loan Vennet (2016) inancial condition regression European regions for government loss provision, of banks before support during nonperforming and after receiving inancial crisis loans and bank state Bank bailout, size perform well inancial crisis in detecting bank bailout

Black and Investigate the Survey of Terms 81 banks Government aid The risk of loan Hazelwood effect of the TARP of Business (including 37 induce excessive originations (2012) or government Lending (STBL) TARP banks and risk-taking increased at large program on bank from November 44 non-TARP TARP banks but risk taking by 2007 to August banks) decreased at small analyzing 2010 TARP banks. the risk ratings of Interest spreads banks' commercial and loan levels also loan during crisis moved in different directions for large and small banks

Gine and Martin Explore the credit Dataset is a panel Government of Important The stimulus (2014) market covering 489 India changes in bank program had no implications and (of 593 total) lending and credit effect on real effects of one districts of India allocation productivity, the largest from 2001 to 2012 wages, or borrower bailout consumption, but programs in led to signiicant history changes in credit allocation and an increase in defaults. Post-program loan performance declines faster in districts with greater exposure to the program, an effect that is not driven by greater risk-taking of banks. Loan defaults become more signiicantly more sensitive to the electrical cycle after the program

Fernandes, Investigate the Using probit model Europe, Banks The enormous The governance Farinha, Martins, determinants of that analyse board which have volume of inancial characteristics of and Mateus bank's bailout in characteristics received bailout crisis and bailout banks, speciically European banks variables (board funds has increased the the characteristics (2016) independence, size, during crisis CEO duality, board need to of boards, bank experience, director understand the risks, as well as tenure, board determinants of bank-level and busyness), risk bailout and there country-speciic variables (credit, is no previous banking sector liquidity, and growth research which features, explain risk), banks variable investigate the the likelihood of (size and capital), control variable determinants of bailouts in the (bank-level, country probability of European banking banking sector, and bailouts during sector macroeconomic, inancial crisis regulatory, corruption) - 10 - Dety Nurfadilah / The Impact of Bailout on Financial Performance And Bank Risk-Taking During Financial Crisis: A Critical Systematic Review / 7- 13

Berger, Roman, Bailouts, systematic Difference in commercial banks countries on contributions to and Sedunov risk, inancial crisis, difference method systemic risk, (2016) U.S Troubled Assets for the period consistent with Relief Program October 2008 to a stabilization of (TARP) December 2010. the inancial Main dependent system. This variables consists inding is robust of expected capital to a battery of shortfall and robustness checks. systemic expected Furthermore, our shortfall, while study complements independent the existing variable consists empirical bailout of bank size, the literature and adds natural log of GTA, to the broad HHI deposits, and debate on the number of beneits and costs branches of bailouts

Table 3. Result and interpretation of included studies impact of bailout on bank performance and bank risk taking

Outcome measures Results Interpretation

1. Bank performance

Gerhardt and Venner (2016) The equity ratio is the decisive indicator When government set up state- to predict stress. The aided banks hardly sponsored rescues, they should require improve their performance indicators rapid and decisive action from the after they have been rescued but rescued banks in terms of business maintain similar risk proiles/business model redesign and structural models governance changes. The faster banks restore their resilience, the better they can again contribute to the inancing of the real economy.

Gianneti and Simonov (2009) Government recapitalizations increase Recapitalizations allow banks to supply the value of bank clients, especially if larger loans to deserving and these have high leverage and are undeserving irms alike and that the therefore very dependent on bank positive effects on the valuation of inancing. After recapitalizations, banks undeserving irms are much larger, extend larger loans to their existing especially if the amount invested to borrowers. recapitalize banks is insuficient to re-establish high levels of bank capitalization. This suggests that capital injections may increase the misallocation of credit if they are not appropriately designed.

2. Bank risk taking

Berger, Roman, and Sedunov (2016) Bank bailouts can help stabilize the Bailout program conducted by inancial system, bailouts may be most government or external bodies may effective in this regard if they are affect systemic risk through altering targeted toward larger banks, safer individual bank leverage risk, portfolio banks, and banks in markets with better risk, or systemic importance. It is also economic conditions, bailouts may be important to analyse the most and least most effective when the systemic effective bailout program in reducing problems are at their worst, and one contribution to systemic risk and help in particular form of bailout, injections of determine the future effective bailout preferred equity, appears to work and additional policies, such as successfully to reduce systemic risk restrictions on common equity dividends through reduced leverage risk. These or buybacks to restrict leverage risk, indings are only based on consideration tighter supervision or regulation of of systemic risk. portfolio risk or limits on executive compensation to offset increased moral hazard incentives, or stiffer requirements for M&A approvals to offset too-big-to- fail incentives created by bailouts.

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Schiozer and Vilarins (2016) Financial institutions with high bailout The bailout expectation and the total expectations assume higher risks than assets of an institution are associated others. In normal times, rescue with greater risk taking. In addition, the guarantees to large inancial institutions rescue expectation of the competitors of distort competition in the sector and an institution also inluences its risk increase the risk of the other institutions. taking. However, depending on the However, during the recent inancial period of analysis, this link can be crisis, increases in the rescue expectation different; that is, in normal periods, there of competitors of an institution, to the is a predominance of the channel extent that they represent a reduction in through which increases in the distort its chance of bailout, decrease its competition, reduce proit margins, and risk taking. increase the risk taking of small institutions. During crises, however, increases indicate lower risk taking. It is assumed that the reason is, the higher of an institution, the lower its relative importance in the system and thus the lower its prospect of eventually being rescued.

DISCUSSION Knowledge of which channels are most effective Implications for banking evaluation may be valuable in the design of future bailouts Bailout program has supported many struggling and accompanying policies. Third, there are banks from collapse. According to Gerhardt and a variety of bailout methods, including injections Vennet (2016), there were approximately 114 of preferred equity, blanket guarantees, extending banks received bailout in the European region liquidity support, nationalizations, and many during the period 2007 – 2013. Bailout program others. Information on whether speciic types of has been launched by the government to avoid the bailouts reduce or increase systemic risk may bank collapse, ensure the effectiveness of payment provide insights for designing any future bailouts system, and minimize the negative impact on the that might be considered. economy (Grande et al., 2011; Beck et al., 2010; Panetta et al., 2009). the effects of bailouts may Limitations differ across types of banks. Information on the This study has some limitations where it only relative effectiveness of bailouts for different types focusses on bank performance and bank-risk of banks is key to targeting any future bailouts. taking, while other indicators can be used for the Choi (2014) stated that recapitalization of stronger future suggestion, namely bank eficiency, bank rather than weaker banks could more effectively distress, interventions, moral hazard. reduce systemic risk. CONCLUSION Berger, Roman, and Sedunov (2016) mentioned The inding from this systematic literature review that there are few things to be considered before suggest the emergency government inancial aid choosing a bailout program. First, when future do impact bank performance positively. However, inancial crises occur and policymakers consider the impact of bank risk taking for the future their options, it is helpful to know whether bailouts needs to be evaluated by robust research to produce tend to combat systemic risk versus make the evidence that informs corporate governance problem worse. Second, bailouts may affect development. This will in turn to provide context systemic risk through many different channels. for further studies and provide an evidence base Some of them operate through altering individual for government and bank practitioners to ensure bank capital and leverage risk, others inluence the sustainability and ongoing bailout and individual bank portfolio risk, and a third set corporate governance reform model. involves increasing bank systemic importance. - 12 - Dety Nurfadilah / The Impact of Bailout on Financial Performance And Bank Risk-Taking During Financial Crisis: A Critical Systematic Review / 7- 13

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