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Are Bank Bailouts Welfare Improving?

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  • Malik Shukayev
  • Alexander Ueberfeldt

Abstract

The financial sector bailouts seen during the Great Recession generated substantial opposition and controversy. We assess the welfare benefits of government-funded emergency support to the financial sector, taking into account its effects on risk-taking incentives. In our quantitative general equilibrium model, the financial crisis probability depends on financial intermediaries’ balance sheet choices, influenced by capital adequacy constraints and ex ante known emergency support provisions. These policy tools interact to make financial sector bailouts welfare improving when capital adequacy constraints are consistent with the current Basel III regulation, but potentially welfare decreasing with looser capital adequacy regulation existing before the Great Recession.

Suggested Citation

  • Malik Shukayev & Alexander Ueberfeldt, 2021. "Are Bank Bailouts Welfare Improving?," Staff Working Papers 21-56, Bank of Canada.
    • Handle: RePEc:bca:bocawp:21-56
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    More about this item

    Keywords

    Financial institutions; Financial stability; Financial system regulation and policies;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • G01 - Financial Economics - - General - - - Financial Crises
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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