Government Interventions in Banking Crises: Effects of Alternative Schemes on Bank Lending and Risk Taking

29 Pages Posted: 3 Mar 2012

See all articles by Diemo Dietrich

Diemo Dietrich

Newcastle University Business School

Achim Hauck

University of Portsmouth

Date Written: May 2012

Abstract

We analyse the effects of policy measures to stop the fall in loan supply following a banking crisis. We apply a dynamic framework in which a debt overhang induces banks to curtail lending or choose a fragile capital structure. Government assistance conditional on new banking activities, like on new lending or on debt and equity issues, allow banks to influence the scale of assistance and externalise risks, implying overinvestment or excessive risk taking or both. Assistance without reference to new activities, like granting lump sum transfers or establishing bad banks, does not generate adverse incentives, but may have higher fiscal costs.

Suggested Citation

Dietrich, Diemo and Hauck, Achim, Government Interventions in Banking Crises: Effects of Alternative Schemes on Bank Lending and Risk Taking (May 2012). Scottish Journal of Political Economy, Vol. 59, No. 2, May 2012, Available at SSRN: https://ssrn.com/abstract=2015153 or http://dx.doi.org/10.1111/j.1467-9485.2011.00573.x

Diemo Dietrich

Newcastle University Business School ( email )

5 Barrack Road
Newcastle-upon-Tyne NE1 7RU, NE1 4SE
United Kingdom

HOME PAGE: http://www.ncl.ac.uk/business-school/staff/profile/diemodietrich.html

Achim Hauck

University of Portsmouth ( email )

Portsmouth Business School
Portsmouth
United Kingdom

HOME PAGE: http://www.port.ac.uk/economics-and-finance/staff/achim-hauck.html

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