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Uncertainty as commitment

Jaromir Nosal and Guillermo Ordonez

No 141, NBP Working Papers from Narodowy Bank Polski

Abstract: Time-inconsistency of no-bailout policies can create incentives for banks to take excessive risks and generate endogenous crises when the government cannot commit. However, at the outbreak of financial problems, usually the government is uncertain about their nature, and hence it may delay intervention to learn more about them. We show that intervention delay leads to strategic restraint: banks endogenously restrict the riskiness of their portfolio relative to their peers in order to avoid being the worst performers and bearing the cost of such delay. These novel forces help to avoid endogenous crises even when the government cannot commit. We analyze the effect of government policies from the perspective of this new result.

Keywords: bailouts; commitment; liquidity; banking; government policy; regulation (search for similar items in EconPapers)
JEL-codes: E61 G21 G28 (search for similar items in EconPapers)
Pages: 57
Date: 2013
New Economics Papers: this item is included in nep-ban
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Journal Article: Uncertainty as commitment (2016) Downloads
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