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Catch, Restrict, and Release: The Real Story of Bank Bailouts

Author

Listed:
  • Sergey Tsyplakov

    (University of South Carolina - Darla Moore School of Business)

  • Allen N. Berger

    (University of South Carolina - Darla Moore School of Business; Wharton Financial Institutions Center; European Banking Center)

  • Steven Ongena

    (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR))

  • Simona Nistor

    (Babes-Bolyai University - Department of Finance)

Abstract

Bank bailouts are not the "one-shot" events commonly described in the literature. These bailouts are instead dynamic processes in which regulators "catch" financially distressed banks; "restrict" their activities over time; and "release" the banks from restrictions at sufficiently healthy capital ratios. The "catch-restrict-release" approach is a global phenomenon, which we document using hand-collected data on capital injection and debt guarantee bailouts in the European Union (EU) over 2008-2014. We present a dynamic theoretical model of socially-optimizing regulators engaging in "catch-restrict-release" capital injection and debt guarantee bailouts, and empirically test model predictions. Observed EU bailouts are qualitatively consistent with optimizing behavior.

Suggested Citation

  • Sergey Tsyplakov & Allen N. Berger & Steven Ongena & Simona Nistor, 2020. "Catch, Restrict, and Release: The Real Story of Bank Bailouts," Swiss Finance Institute Research Paper Series 20-45, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2045
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    File URL: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3611480
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    Cited by:

    1. Ongena, Steven & Savaşer, Tanseli & Şişli Ciamarra, Elif, 2022. "CEO incentives and bank risk over the business cycle," Journal of Banking & Finance, Elsevier, vol. 138(C).
    2. Alexandra Matyunina & Steven Ongena, 2022. "Bank capital buffer releases, public guarantee programs, and dividend bans in COVID-19 Europe: an appraisal," European Journal of Law and Economics, Springer, vol. 54(1), pages 127-152, August.
    3. Mücke, Christian & Pelizzon, Loriana & Pezone, Vincenzo & Thakor, Anjan V., 2021. "The carrot and the stick: Bank bailouts and the disciplining role of board appointments," SAFE Working Paper Series 316, Leibniz Institute for Financial Research SAFE, revised 2021.
    4. Reint Gropp & Steven Ongena & Jörg Rocholl & Vahid Saadi, 2022. "The cleansing effect of banking crises," Economic Inquiry, Western Economic Association International, vol. 60(3), pages 1186-1213, July.
    5. Daniele Petrone & Neofytos Rodosthenous & Vito Latora, 2022. "An AI approach for managing financial systemic risk via bank bailouts by taxpayers," Nature Communications, Nature, vol. 13(1), pages 1-18, December.

    More about this item

    Keywords

    bailout; debt guarantees; capital injections; bailout restrictions; regulatory restriction phase; restriction duration;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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