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Bailouts and Systemic Insurance

Giovanni Dell'ariccia () and Lev Ratnovski ()

No 13/233, 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: Financial crises; Banking crises; Bank resolution; Moral hazard; Systemic risk; Bailouts, contagion, banking, bank risk, bank risk taking, Government Policy and Regulation, (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cta, nep-ias and nep-rmg
Date: 2013-11-12
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Journal Article: Bailouts and systemic insurance (2019) Downloads
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