Safety-Net Benefits Conferred on Difficult-to-Fail-And-Unwind Banks in the Us and EU Before and During the Great Recession
35 Pages Posted: 14 Feb 2011 Last revised: 16 May 2021
Date Written: February 2011
This paper models and estimates ex ante safety-net benefits at a sample of large banks in US and Europe during 2003-2008. Our results suggest that difficult-to-fail and unwind (DFU) banks enjoyed substantially higher ex ante benefits than other institutions. Safety-net benefits prove significantly larger for DFU firms in Europe and bailout decisions less driven by asset size than in the US. We also find that a proxy for regulatory capture helps to explain bailout decisions in Europe. A policy implication of our findings is that authorities could better contain safety-net benefits if they refocused their information systems on measuring volatility as well as capital.
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