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Collective Moral Hazard, Maturity Mismatch, and Systemic Bailouts

Listed author(s):
  • Emmanuel Farhi
  • Jean Tirole

The article shows that time-consistent, imperfectly targeted support to distressed institutions makes private leverage choices strategic complements. When everyone engages in maturity mismatch, authorities have little choice but intervening, creating both current and deferred (sowing the seeds of the next crisis) social costs. In turn, it is profitable to adopt a risky balance sheet. These insights have important consequences, from banks choosing to correlate their risk exposures to the need for macro-prudential supervision. (JEL D82, E52, E58, G01, G21, G28)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.1.60
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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 102 (2012)
Issue (Month): 1 (February)
Pages: 60-93

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Handle: RePEc:aea:aecrev:v:102:y:2012:i:1:p:60-93
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References listed on IDEAS
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  20. Ernesto Pastén, 2011. "Time - Consistent Bailout Plans," Working Papers Central Bank of Chile 635, Central Bank of Chile.
  21. Viral V. Acharya & Tanju Yorulmazer, 2008. "Cash-in-the-Market Pricing and Optimal Resolution of Bank Failures," Review of Financial Studies, Society for Financial Studies, vol. 21(6), pages 2705-2742, November.
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