Bailouts and Systemic Insurance

November 12, 2013

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Giovanni Dell'Ariccia, and Lev Ratnovski. Bailouts and Systemic Insurance, (USA: International Monetary Fund, 2013) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

We revisit the link between bailouts and bank risk taking. The expectation of government support to failing banks creates moral hazard—increases bank risk taking. However, when a bank’s success depends on both its effort and the overall stability of the banking system, a government’s commitment to shield banks from contagion may increase their incentives to invest prudently and so reduce bank risk taking. This systemic insurance effect will be relatively more important when bailout rents are low and the risk of contagion (upon a bank failure) is high. The optimal policy may then be not to try to avoid bailouts, but to make them “effective”: associated with lower rents.

Subject: Bank credit, Banking, Commercial banks, Distressed institutions, Financial institutions, Financial sector policy and analysis, Insurance, Money, Moral hazard, Tax incentives

Keywords: Bailouts, Bank capital, Bank credit, Bank incentive, Bank investment strategies, Bank monitoring, Bank owner, Bank portfolio, Bank resolution, Bank risk taking, Bank shareholder, Banking crises, Banking system, Commercial banks, Contagion, Distressed institutions, Financial system, Insurance, Moral hazard, Systemic risk, WP

Publication Details

Pages:

28
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2013/233
Stock No:

WPIEA2013233
ISBN:

9781475514742
ISSN:

1018-5941

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