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Financial safety nets, bailouts and moral hazard

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  • Jaime Hurtubia Torres
  • Claudio Sardoni

    ()
    (Department of Economics,Sapienza University of Rome)

Abstract

The paper argues that policymakers bail out banks with financial problems to avoid the costs of financial repression. After financial liberalization and when risk is verifiable, in some circumstances policymakers can commit to policies that discipline banks ex-ante and ex-post, by providing bailout to conservative banks and threatening the takeover of risky banks. When these policies are time consistent, regulatory policies to deal with moral hazard ex-ante, like for example prudential regulation, become redundant and policymakers refrain from implementing them.

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File URL: http://phdschool-economics.dse.uniroma1.it/website/workingpapers/hurtubiaWP8.pdf
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Bibliographic Info

Paper provided by Doctoral School of Economics, Sapienza University of Rome in its series Working Papers with number 8.

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Length: 38 pages
Date of creation: 2010
Date of revision: 2010
Handle: RePEc:dsc:wpaper:8

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Web page: http://phdschool-economics.dse.uniroma1.it/website/
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  1. Graciela L. Kaminsky & Carmen M. Reinhart, 1996. "The twin crises: the causes of banking and balance-of-payments problems," International Finance Discussion Papers 544, Board of Governors of the Federal Reserve System (U.S.).
  2. Gary Gorton & Lixin Huang, 2002. "Liquidity, Efficiency and Bank Bailouts," NBER Working Papers 9158, National Bureau of Economic Research, Inc.
  3. Eduardo Levy Yeyati & Tito Cordella, 1999. "Bank Bailouts," IMF Working Papers 99/106, International Monetary Fund.
  4. Osano, Hiroshi, 2002. "Managerial compensation contract and bank bailout policy," Journal of Banking & Finance, Elsevier, vol. 26(1), pages 25-49, January.
  5. Philippe Aghion, Patrick Bolton & Steven Fries, 1999. "Optimal Design of Bank Bailouts: The Case of Transition Economies," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 155(1), pages 51-, March.
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