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Bank bailouts: moral hazard vs. value effect

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  • Cordella, Tito
  • Yeyati, Eduardo Levy

Abstract

This paper shows that a central bank, by announcing and committing ex-ante to a bailout policy that is contingent on the realization of certain states of nature (for example on the occurrence of an adverse macroeconomic shock), creates a risk-reducing “value effect” that more than outweighs the moral hazard component of such a policy.
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  • Cordella, Tito & Yeyati, Eduardo Levy, 2003. "Bank bailouts: moral hazard vs. value effect," Journal of Financial Intermediation, Elsevier, vol. 12(4), pages 300-330, October.
  • Handle: RePEc:eee:jfinin:v:12:y:2003:i:4:p:300-330
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