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Prudential Policies and Bailouts: A Delicate Interaction

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  • Ernesto Pasten

    (Banco Central de Chile)

Abstract

Could prudential policies backfire by making the lack of commitment problem of bailouts worse? This commitment problem refers to the excessive risk taken by banks and financial institutions in expectations of bailouts if crises occur, which in turn increase financial fragility and the severity of crises. Ex-ante policies, such as prudential policies, have a variety of effects on the various components of the ex-post incentives of an authority to implementing a bailout. Thus, the interaction between prudential policies and bailouts is delicate: In different conditions, a given prudential policy may backfire or increase its effectiveness by worsening or alleviating the lack of commitment problem of bailouts. Liquidity requirements and prudential taxes are examples of prudential policies that may backfire. Public debt is an example of an ex-ante policy usually with no prudential motivation that may play such a role. (Copyright: Elsevier)

Suggested Citation

  • Ernesto Pasten, 2020. "Prudential Policies and Bailouts: A Delicate Interaction," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 38, pages 181-197, October.
    • Handle: RePEc:red:issued:18-431
    DOI: 10.1016/j.red.2020.04.003
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    More about this item

    Keywords

    Lack of commitment problem; Bailouts; Monetary policy; Prudential Policy;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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