Political bargaining and multinational bank bailouts

Abstract

This article examines the role of political bargaining and state institutions in explaining variation in state support to multinational banks (MNBs). International business theory predicts that multinational enterprises will engage in political activities to gain a competitive advantage over rivals. I hypothesize that MNBs with greater bargaining power and favorable institutions received state capital injections on more attractive terms than foreign rivals. I test this hypothesis by studying the October 2008 state recapitalizations of MNBs by the UK, France, Germany, the United States, and Switzerland. I measure the relative attractiveness of state bailouts by comparing the bank stock price reactions when the bailouts were announced. The stock prices of MNBs receiving more favorable state support outperformed foreign rivals, reflecting the competitive advantage gained. States imposed more punitive terms on banks when political and legal institutions were more favorable and MNBs were unable to form a coalition. States that are highly dependent on banks and where state bailouts were large relative to GDP were also more punitive. These findings highlight the importance of political behavior as a tool of strategy, and the need for coordination on banking policy across states to reduce moral hazard.