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

Abstract

*Corresponding Author E-mail: [email protected] © 2019 IJBS, All rights reserved. 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. International Journal of Business Studies Vol. 3 No. 1 ( February 2019) Landsbanki in Iceland; Bankia, CatalunyaCaixa, CajaSur in Spain; Parex Bank in Latvia; UBS in Switzerland; Fortis and BNP Paribas in Belgian and Luxembourg; Bank of Antigua in Eastern Caribbean; Banco Privado Portugues in Portugal; Anglo Irish Bank in Ireland; BTA bank and Alliance bank in Kazakhstan and so forth so on (White, 2008; Mclaughlin & Levring, 2008). In the Asia Paci ic region, it caused the collapse of Lehman brothers in Japan and Bank West in Australia (KyodoNews, 2008; Kramer & Andrews, 2009). According to Terazi and Şenel (2011), an unprecedentedly large number of failed banks has increased the government attention to enacted a range of rescue plans to help banks restore its health and con idence, as well as increase its inancial stability. In 2007, The US Federal Reserve offered a loan to several banks and made more funding available around $20bn, then European Central Bank offered $500bn to assist commercial banks. In 2008, United States launched Troubled Asset Relief Program (TARP) with the total fund given around $700bn (Guillén, 2009), while British Government launched a bank rescue package with approximately $850 billion. According to the International Monetary Fund (2010), Latvia in the Baltic States suffered from the crisis and urged to ask for inancial support. The government support continues until this day. In 2016, Italy government approve to give fund around €20bn to support Monte Dei Paschi di Siena (BBC, 2016). However, previous researchers argue that bailout is making the bank worse in many ways. It increases the bank risk-taking, volatility, and default risk, and create a moral hazard problem (Duchin and Sosyura, 2014). Unfortunately, this issue is often ignored by the government and other inancial aid bodies because they are focusing on “too big to fail institution” mindset. Also, the cost of the bailout is very expensive. Every decision made by the government will have consequences on bank performance. Gerhardt and Vennet (2016) added that the massive bailout program has increased the question about the effect on government intervention on future bank behavior. Therefore, there is an increasing need to understand the impact of government inancial aid on bank crisis performance and its risk-taking. To the best of author s knowledge, this is the irst study to create a comprehensive systematic review on this issue. To date, the existing studies have examined the effect of bailout on bank future behavior (Fisher et al., 2012; Dam and Koetter, 2012; Gropp et al., 2011), impact of capital injections (Duchin and Sosyura, 2013; Berger et al. (2011); Mehran and Thakor (2011). A critical review of the literature was conducted to address the following question: what is the impact of bailout on bank performance during the inancial crisis? And what is the impact of bailout on bank risk-taking during the inancial crisis? This study is organized as follows: section 1 present the background of the study, section 2 describe research methodology, section 3 state the result, section 4 discuss the result, section 5 describes the limitations, and section 6 concludes the study. RESEARCH METHOD Design Systematic review and narrative are used in this study to present a critical overview of the research topic and evaluate the quality of the previous studies (Ressing et al., 2009). A systematic review is one type of literature review that collect and summarize all studies based on criteria (Khan et al., 2003). This systematic reviews aimed to systematically examine the scienti ic literature to understand the impact of bailout on bank performance and bank risk-taking. Search Strategy To achieve the research objectives, multiple-step search strategy was adopted from the previous study in the ield of inancial institution (International Finance Corporation, 2013), nurse services (Carter and Chochinov, 2007; Jennings et al., 2015), and construction management (Hong et al, 2012; Yi and Wang, 2013; Osei-Kyei and Chan, 2015). The two-step review was used to get a high-quality paper. At the irst stage, the authors created a list of thematic ield group about the bailout. At the second stage, this list was narrowed down to sub-theme focusing on the impact on bank