Bank bailouts and economic growth: Evidence from cross-country, cross-industry data

In this paper, we revisit the question of how bank bailouts affect economic growth. We adopt a broad concept of bailouts, which includes both capital injections and liquidity support to the banking system. We employ an identification strategy that controls for the various dimensions of bailout endogeneity and find that liquidity support has a significant positive real economic effect. The effect of recapitalizations per se is not statistically significant, but they reinforce the positive impact of liquidity interventions. Utilizing bank-level data, we provide evidence that this is the case because better-capitalized banks and banks in significantly recapitalized systems have a higher propensity to lend, thus raising aggregate-level real economic growth.