Inefficient Bank Recapitalization, Bailout and Post-Crisis Recoveries

Andrea Modena ()

CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany

Abstract: We study bailouts in a macroeconomic model where banks provide services that facilitate firms’ investments but limit their own leverage to prevent costly recapitalizations. This precautionary motive can generate financial crises, in which banks’ limited intermediation capacity discourages investments and dampens growth. Bank recapitalizations are constrained-inefficient because they do not internalize that, in the aggregate, higher equity buffers allow for more intermediation, favouring investments and accelerating recoveries. System-wide bailouts can mitigate this inefficiency and improve long-run welfare as long as their positive effect on banks’ equity value outweighs their negative impact on risk-taking incentives.

Keywords: bailout; efficiency; financial crisis; general equilibrium; recovery; welfare (search for similar items in EconPapers)
JEL-codes: D51 G21 (search for similar items in EconPapers)
Pages: 48
Date: 2023-04
New Economics Papers: this item is included in nep-ban, nep-des and nep-dge
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Persistent link: https://EconPapers.repec.org/RePEc:bon:boncrc:crctr224_2023_415

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