Are Bank Bailouts Welfare Improving?

Malik Shukayev () and Alexander Ueberfeldt
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Malik Shukayev: University of Alberta, Department of Economics, Postal: 8-14 HM Tory Building, Edmonton, AB, T6G 2H4

No 2021-10, Working Papers from University of Alberta, Department of Economics

Abstract: The financial sector bailouts seen during the Great Recession generated substantial opposition and controversy. We assess the welfare benefits of government-funded emergency support to the financial sector, taking into account its effects on risk-taking incentives. In our quantitative general equilibrium model, the financial crisis probability depends on financial intermediaries' balance sheet choices, influenced by capital adequacy constraints and ex ante known emergency support provisions. These policy tools interact to make financial sector bailouts welfare improving when capital adequacy constraints are consistent with the current Basel III regulation, but potentially welfare decreasing with looser capital adequacy regulation existing before the Great Recession.

Keywords: fire sales externality; short-term bank funding; endogenous financial crises; bank regulation; bailouts; government guarantees (search for similar items in EconPapers)
JEL-codes: D62 E32 E44 G01 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2021-11-16
New Economics Papers: this item is included in nep-ban, nep-dge, nep-fdg, nep-mac and nep-rmg
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Working Paper: Are Bank Bailouts Welfare Improving? (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:ris:albaec:2021_010

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