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Government interventions in banking crises: effects of alternative schemes on bank lending and risk taking

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  • Diemo Dietrich
  • Achim Hauck

Abstract

We evaluate policy measures to stop the fall in loan supply following a banking crisis. We apply a dynamic framework in which a debt overhang induces banks to curtail lending or to choose a fragile capital structure. Government assistance conditional on new banking activities, like on new lending or on debt and equity issues, allows banks to influence the scale of the assistance and to externalize risks, implying overinvestment or excessive risk taking or both. Assistance granted without reference to new activities, like establishing a bad bank, does not generate adverse incentives but may have higher fiscal costs.
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Suggested Citation

  • Diemo Dietrich & Achim Hauck, 2012. "Government interventions in banking crises: effects of alternative schemes on bank lending and risk taking," Scottish Journal of Political Economy, Scottish Economic Society, vol. 59(2), pages 133-161, May.
  • Handle: RePEc:bla:scotjp:v:59:y:2012:i:2:p:133-161
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    References listed on IDEAS

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    2. Praet, Peter & Nguyen, Grégory, 2008. "Overview of recent policy initiatives in response to the crisis," Journal of Financial Stability, Elsevier, vol. 4(4), pages 368-375, December.
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    10. Douglas W. Diamond & Raghuram G. Rajan, 2001. "Liquidity Risk, Liquidity Creation, and Financial Fragility: A Theory of Banking," Journal of Political Economy, University of Chicago Press, vol. 109(2), pages 287-327, April.
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    Cited by:

    1. Hauck, Achim & Vollmer, Uwe, 2013. "Emergency liquidity provision to public banks: Rules versus discretion," European Journal of Political Economy, Elsevier, vol. 32(C), pages 193-204.
    2. Hauck, Achim & Neyer, Ulrike & Vieten, Thomas, 2015. "Reestablishing stability and avoiding a credit crunch: Comparing different bad bank schemes," The Quarterly Review of Economics and Finance, Elsevier, vol. 57(C), pages 116-128.
    3. Bucher, Monika & Dietrich, Diemo & Hauck, Achim, 2013. "Implications of Bank Regulation for Credit Intermediation and Bank Stability: A Dynamic Perspective," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79792, Verein für Socialpolitik / German Economic Association.
    4. Alin-Marius ANDRIEȘ & Florentina IEȘAN-MUNTEAN & Simona NISTOR, 2016. "The effectiveness of policy interventions in CEE countries," Eastern Journal of European Studies, Centre for European Studies, Alexandru Ioan Cuza University, vol. 7, pages 93-124, June.
    5. Dietrich, Diemo & Vollmer, Uwe, 2012. "Are universal banks bad for financial stability? Germany during the world financial crisis," The Quarterly Review of Economics and Finance, Elsevier, vol. 52(2), pages 123-134.
    6. Projektgruppe Gemeinschaftsdiagnose, 2012. "Deutsche Konjunktur im Aufwind – Europäische Schuldenkrise schwelt weiter," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 65(08), pages 03-72, April.
    7. Michael Diemer & Uwe Vollmer, 2015. "What makes banking crisis resolution difficult? Lessons from Japan and the Nordic Countries," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 5(2), pages 251-277, December.

    More about this item

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G01 - Financial Economics - - General - - - Financial Crises

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