This paper analyzes the effect of bank recapitalizations on lending, funding and asset quality of European banks between 2000 and 2013. Controlling for market implied capital shortfall of banks, we find that banks that receive a sufficiently large recapitalization increase lending, raise additional funding and clean up their balance sheets. In contrast, banks that receive a small recapitalization relative to their capital shortfall reduce lending, shrink their risk weighted assets and suffer a drop in deposits and interbank borrowing. These results suggest recapitalizations need to be large enough to lead to new lending.

Discussant: Simas Kucinskas (VU University Amsterdam)