Bailouts and Systemic Insurance

29 Pages Posted: 10 Dec 2013

See all articles by Giovanni Dell'Ariccia

Giovanni Dell'Ariccia

International Monetary Fund (IMF) - Research Department; Centre for Economic Policy Research (CEPR)

Lev Ratnovski

International Monetary Fund; European Central Bank, Financial Research Division

Date Written: November 2013


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: Banking crisis, Financial intermediation, Moral hazard, Banking systems, Risk management, Economic models, Bailouts, banking crises, systemic risk, contagion, bank resolution, bank risk, bank risk taking, bank monitoring, bank incentives, bank failure, bank capital, deposit insurance, bank regulation, capital regulation, recession, bank profits, bank funding, bank failures, bankrupt, financial crises, bank risks, bank investment, credit booms, bank research, bank risk-taking, interbank market, bank bailouts, bank closure, bank shareholders, financial contagion, crisis management, resolution of banking crises, bank for international settlements, bank owners, bank portfolio

JEL Classification: G01, G21, G28

Suggested Citation

Dell'Ariccia, Giovanni and Ratnovski, Lev, Bailouts and Systemic Insurance (November 2013). IMF Working Paper No. 13/233, Available at SSRN:

Giovanni Dell'Ariccia (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-8135 (Phone)
202-623-4352 (Fax)

Centre for Economic Policy Research (CEPR)

United Kingdom

Lev Ratnovski

International Monetary Fund ( email )

700 19th Street, N.W.
Washington, DC 20431
United States


European Central Bank, Financial Research Division


Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
PlumX Metrics