Financial safety nets, bailouts and moral hazard

Jaime Hurtubia Torres and Claudio Sardoni ()

No 8, Working Papers from Doctoral School of Economics, Sapienza University of Rome

Abstract: 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.

JEL-codes: G01 G21 G28 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2010, Revised 2010
New Economics Papers: this item is included in nep-ban, nep-cta and nep-reg
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