The rationale behind government intervention and fiscal policy has come under intense scrutiny in recent times because of the episode of the global financial crisis. Many governments were averse to the idea of bank failures as liquidation or bankruptcy of banking institutions may have devastating implications on the financial system and the economy of the country in the whole. To that end, governments adopted a host of rescue packages to prevent the collapse of affected banking institutions. Chang (2014) suggested that recuse packages adopted to stabilise banking institutions are divided into three main categories: government purchases of distressed assets, government guaranteed debt issuance programs, and direct equity capital injections.
On account of the above, the countries that were plagued and adopted various rescue initiatives include: Canada (distressed asset purchases), Italy (direct capital injections), Australia (asset purchases and guaranteed debt issuance), Japan and Switzerland (asset purchases and capital injections), Austria and Sweden (issuance and capital injection), Belgium, Denmark, France, Spain, Netherlands, United States of America, and United Kingdom (asset purchases, debt issuance, and capital injections) (Brei, Gambacorta, & von Peter, 2013; Chang, 2014). To be specific, a few of the above rescue packages are reviewed to set the tune for the analysis of the initiatives of Nigerian regulators within the period under review.
The central aim for adopting rescue packages is to support financial institutions in distress. However, this raises a vital question: Should distressed financial institutions be rescued by the government and therefore by tax payers? For one thing, rescue measures seem proper given that the bankruptcy costs for the economy would exceed the costs of the rescue. On the flipside, with a government as the lender of last resort, there is little incentive for institutions to take on sophisticated risk management strategies. Hence, the issue of moral hazard. In light of the above, the appropriate design of rescue packages seems the preferred route to safeguarding the financial system. To that end, the design of a rescue package should depend largely on the targets. To name a few, the stabilisation of financial systems through recapitalisation, taxpayer protection, and separation between good and bad management performance are examples of reasons why governments design rescue packages. Additionally, the costs associated with bank failure are not easily quantified, therefore
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making it difficult to determine an exact trade-off (Breitenfellner & Wagner, 2010). The position above suggests that although rescue packages do not always achieve the objective of which they are designed, the role of government as the lender of last resort and the mandate to promote financial stability prevails.
Regarding the general effectiveness of rescue packages, Klomp (2013) examined the effectiveness of financial sector rescue packages advanced by national governments during the global financial crisis. The results suggest that there exists a significant negative relationship between various rescue packages and default risk. That is, government interventions have a negative impact on the change of the credit default premium. More so, the obtained results showed that the effect of the various rescue packages varied across banking institutions: most interventions do not have a significant effect on low-risk banks, while they affect high-risk banks. Additionally, Klomp found that interventions aimed at a specific financial institution are more effective than broad interventions taken to stabilise the financial system as a whole.
Kollmann, Roeger, & in't Veld (2012) in contributing to the intense debate on the efficacy of government stimulus packages opined that government support for the banking system can have a strong positive effect on real activity. In essence, support extended to banking institutions has a positive effect on investment, while a rise in government purchases crowds out investment.
Ait-Sahalia, Andritzky, Jobst, Nowak, & Tamirisa (2012) examined the impact of macroeconomic and financial policy announcements in the U.S.A, U.K, the Euro zone, and Japan during the recent global financial crisis. They found that market moves surrounding policy announcements suggest that markets viewed interest rates cuts and bank recapitalisation as the most promising policy steps to resolve the crisis. Secondly, they also found that domestic policy initiatives often had significant bearing on credit and liquidity risk premium in foreign interbank markets. Hence, international spillovers of policy announcements were amplified as the crisis deepened and policy makers doubled their efforts to restore financial stability. In addition, Ait-Sahalia et al. (2012) are of the opinion that system-wide rescue packages may be less effective because their impact is more difficult to gauge.
To be particular, the government of the United States adopted the Trouble Asset Relief Program (TARP) to help stabilise the financial system, restart economic growth, and avert
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preventable collapses during the global financial crisis in 2008. The cornerstone of the programme was the purchase of equity capital in financial institutions. To that end, institutions like the American International Group, Citibank, and Bank of America got involved in the TARP programme. Consequently, the above banks were spared from collapse (Chang & Chen, 2016). Additionally, different studies have either hailed or criticised the TARP. Apart from preventing the collapse of some institutions, Berger & Roman, (2015) suggested that the TARP gave participating institutions a competitive advantage in raising deposits because they were perceived to be safer. On the contrary, Montgomery & Takahashi (2014) empirically examined the impact of the bank recapitalisation programme of the TARP and found evidence that overturned much of the existing literature on the effectiveness of capital injections into the banking sectors of the United States and Japan. Montgomery & Takahashi, (2014) showed that the TARP programme failed to achieve the stated policy objective of stimulating bank lending. More so, they found that banking institutions that received capital injections grew assets significantly slower, for the most part heavily risk- weighted assets such as loans. The submissions expressed suggest that even though government rescue packages forestall the collapse of banking institutions, they do not eliminate the problem of moral hazard.
Conclusively, this section reviewed the rationale behind the recourse to government rescue packages and enumerated countries that relied on at least one the three main categories of the rescue packages due to the episode of the global financial crisis. The experience of the U.S is presented to further indicate the diversity in literature concerning the debate of relying on rescue. However, even though the problem of moral hazard cannot be separated from government rescue packages, the ability of rescue packages in averting banking collapse cannot be faulted. Additionally, further government rescue initiatives are discussed under the section of financial safety nets.