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Bank bailouts: moral hazard vs. value effect

  • Cordella, Tito
  • Yeyati, Eduardo Levy

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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File URL: http://www.sciencedirect.com/science/article/B6WJD-49G5R1R-6/2/45945710794ce2f30df0d54be27671bd
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Article provided by Elsevier in its journal Journal of Financial Intermediation.

Volume (Year): 12 (2003)
Issue (Month): 4 (October)
Pages: 300-330

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Handle: RePEc:eee:jfinin:v:12:y:2003:i:4:p:300-330
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622875

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  16. Bhattacharya Sudipto & Thakor Anjan V., 1993. "Contemporary Banking Theory," Journal of Financial Intermediation, Elsevier, vol. 3(1), pages 2-50, October.
  17. Michael D. Bordo, 1989. "The lender of last resort: some historical insights," Proceedings 234, Federal Reserve Bank of Chicago.
  18. Yuk-Shee Chan & Stuart I. Greenbaum & Anjan V. Thakor, 2004. "Is Fairly Priced Deposit Insurance Possible?," Finance 0411018, EconWPA.
  19. Keeley, Michael C, 1990. "Deposit Insurance, Risk, and Market Power in Banking," American Economic Review, American Economic Association, vol. 80(5), pages 1183-1200, December.
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