European Parliament Library

Bailouts and Systemic Insurance, Giovanni Dell'Ariccia, Lev Ratnovski

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
Table Of Contents
Cover; Contents; I. Introduction; II. Stylized Facts on Contagion and Bailouts; III. A Model of Bank Risk Taking and Bailouts; A. Contagion and Risk Taking; B. Effects of Bailouts; C. The Role of Bank Capital; D. The Case with Distressed Banks; IV. A Model with Correlated Risks; A. Contagion and Correlated Risks; B. Effects of Bailouts; V. Conclusions; References; Figure; 1. Game Tree: The Effects of Contagion; 2. Game Tree: The Effects of Government Intervention
Literary Form
non fiction
Description based upon print version of record
Physical Description
1 online resource (29 p.)
Specific Material Designation
Form Of Item

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