Market response to policy initiatives during the global financial crisis

This paper examines the impact of macroeconomic and financial sector policy announcements in the United States, the United Kingdom, the euro area, and Japan on interbank credit and liquidity risk premia during the recent crisis. Overall, policy interventions were associated with a reduction in interbank risk premia, most significantly for recapitalization programs. By contrast, decisions to bail out individual banks in an ad hoc manner or let them fail were accompanied by a significant rise in interbank risk premia. Most policy announcements had international spillovers. These results are broadly robust to using alternative measures of financial distress and varying the size of the event window.