Financial safety nets, bailouts and moral hazard
The paper argues that policymakers bail out banks with financial problems to avoid the costs of financial repression. After financial liberalization and when risk is verifiable, in some circumstances policymakers can commit to policies that discipline banks ex-ante and ex-post, by providing bailout to conservative banks and threatening the takeover of risky banks. When these policies are time consistent, regulatory policies to deal with moral hazard ex-ante, like for example prudential regulation, become redundant and policymakers refrain from implementing them.
|Date of creation:||2010|
|Date of revision:||2010|
|Contact details of provider:|| Web page: http://phdschool-economics.dse.uniroma1.it/website/|
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- Graciela L. Kaminsky & Carmen M. Reinhart, 1996.
"The twin crises: the causes of banking and balance-of-payments problems,"
International Finance Discussion Papers
544, Board of Governors of the Federal Reserve System (U.S.).
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NBER Working Papers
9158, National Bureau of Economic Research, Inc.
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IMF Working Papers
99/106, International Monetary Fund.
- Philippe Aghion, Patrick Bolton & Steven Fries, 1999. "Optimal Design of Bank Bailouts: The Case of Transition Economies," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 155(1), pages 51-, March.
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