IDEAS home Printed from https://ideas.repec.org/a/eee/mateco/v111y2024ics0304406824000016.html
   My bibliography  Save this article

Bank bailouts: Moral hazard and commitment

Author

Listed:
  • Sim, Khai Zhi

Abstract

This paper investigates moral hazard from bank bailouts and its welfare implications. The traditional channel of moral hazard in existing literature arises from banks offering excessively attractive deposit contracts that lead to inefficiently large bailouts when there is a run. This paper introduces a new, second channel of moral hazard: bailouts discourage banks from offering deposit contracts that deter panic-based runs. It also identifies when the second channel is active, and decomposes the welfare losses contributed by the two channels. Whenever the second channel is active, commitment on the bailout policy alone is unable to fully eliminate the welfare loss from moral hazard. Alternative regulations such as controlling short-term interest rates offered by banks are necessary to achieve efficiency. Additionally, the second channel can cause welfare to be increasing with the probability of bank runs. The increased run probability helps encourage banks to offer run-proof contracts, easing the necessary effort from the fiscal authority to intervene.

Suggested Citation

  • Sim, Khai Zhi, 2024. "Bank bailouts: Moral hazard and commitment," Journal of Mathematical Economics, Elsevier, vol. 111(C).
    • Handle: RePEc:eee:mateco:v:111:y:2024:i:c:s0304406824000016
    DOI: 10.1016/j.jmateco.2024.102939
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0304406824000016
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jmateco.2024.102939?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:mateco:v:111:y:2024:i:c:s0304406824000016. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jmateco .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.