Does the Amount and Time of Recapitalization Affect the Profitability of Commercial Banks

In this paper we study the effects of bank recapitalization on profitability during the recent global financial crisis. We used data from 91 systemically important banks in the EU and the US. We found that a higher amount of recapitalization increases a bank’s profitability with a lag of one year. Recapitalizations performed in the first two years of the crisis had an immediate negative effect on profitability but it became positive when we tested it at the end of our analysed period, i.e. when most of the banks were out of the crisis. The positive effect on profitability was present only in banks recapitalized in the first two years of the crisis and negative for banks recapitalized later on in the crisis. When we simultaneously tested the effect of time and the amount of recapitalization, we found that in banks recapitalized in the first two years of the crisis, the positive effect on profitability increased with the amount of recapitalization.