An overlapping generations model of taxpayer bailouts of banks

Oz Shy and Rune Stenbacka

Journal of Financial Stability, 2017, vol. 33, issue C, 71-80

Abstract: The paper constructs an overlapping generations model to evaluate how different bank rescue plans affect banks’ risk-taking incentives. For a non-competitive banking industry, we find bailout with tax imposed on the old generation or equity bail-in to be efficient policies in the sense that they implement socially optimal risk-taking. In a competitive banking sector, no-bailout implements the socially-optimal risk-taking. Bailout policies financed by a tax imposed on the young generation always induce excessive risk-taking.

Keywords: Bank failures; Taxpayer bailout of banks; Equity bail-in; Risk-taking by banks; Financial fragility (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:33:y:2017:i:c:p:71-80

DOI: 10.1016/j.jfs.2017.10.003

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