Explaining state support to European banks during the crisis: Which implications for regulation?

We examine whether pre-crisis bank characteristics explain state support to European banks during the global financial crisis. We show that, before the crisis, supported and non-supported banks differ in numerous aspects and the differences reflect bank characteristics at the core of the regulatory agenda. In particular, bank size and the related too-big-to-fail concerns play a dominant role in explaining state support in Europe. Furthermore, our results suggest that income diversification produces a decline in the expected bailout costs for public finance in large banks and an increase of these costs in small and medium banks. The decline observed for large banks is nevertheless lower than the expected additional bailout costs generated by the presence of these banks in the financial system. Our findings highlight the importance of ad hoc prudential requirements and cross-country resolution regimes for large European banks and justify the introduction of regulatory restrictions on income diversification if applied to banks of small and medium size or if they lead to a significant decrease in the size of large banks