Bailouts and Systemic Insurance

Giovanni Dell'ariccia and Lev Ratnovski ()

No 2013/233, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: WP; financial system; banking system; Bailouts; banking crises; moral hazard; systemic risk; contagion; bank resolution; bank risk taking; bank incentive; bank investment strategies; bank portfolio; bank monitoring; bank capital; bank shareholder; bank owner; Distressed institutions; Commercial banks; Bank credit; Insurance (search for similar items in EconPapers)
Pages: 28
Date: 2013-11-12
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Citations: View citations in EconPapers (7)

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Journal Article: Bailouts and systemic insurance (2019)
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