Government Finances and Banks Bailouts : Evidence from European Stock Markets

Using a sample of European banks and a series of events affecting governments' finances, we conduct an event study to examine whether there is a relationship between governments' fiscal difficulties and banks' stock returns. We find a significant reaction of banks' stocks to news concerning governments' finances. Banks stock returns fall in response to a deterioration of governments' financial situation. We find little difference in the reaction between large and small banks. The evidence points towards all banks being equally likely to be bailed out. It might be argued that the policy implemented during the eurozone sovereign-debt crisis is "No Bank is Too Small to Save"