The structure of financial markets and the form of state bailouts, 1974–2009

The form of state bailouts of banks can vary widely. Some are highly interventionist, expanding state control and pushing losses onto private actors, while others insulate private actors from losses. This paper demonstrates that the nature of national financial systems is a key determinant of the form of state intervention, through a statistical analysis of state responses to financial crises in the upper middle-income and upper-income states from 1974 to 2009. States that rely on private banks for most capital needs generally adopt more generous terms than states where capital markets play a significant role. These effects are both statistically significant and large. States with capital market-based financial systems are one and a half times more likely to nationalize banks and over twice as likely to recover state bailout funds. Moreover, other seemingly important variables, such as party ideology, do not produce significant effects.