An Overlapping Generations Model of Taxpayer Bailouts of Banks

30 Pages Posted: 2 Mar 2016 Last revised: 24 Sep 2017

See all articles by Oz Shy

Oz Shy

Federal Reserve Banks - Federal Reserve Bank of Atlanta

Rune Stenbacka

Hanken School of Economics

Date Written: September 23, 2017

Abstract

The paper constructs an overlapping generations model to evaluate how different bank rescue plans affect banks' risk-taking incentives. For a non-competitive banking industry, we find bailout with tax imposed on the old generation or equity bail-in to be efficient policies in the sense that they implement socially optimal risk-taking. In a competitive banking sector, no-bailout implements the socially-optimal risk-taking. Bailout policies financed by a tax imposed on the young generation always induce excessive risk-taking.

Keywords: Bank failures, taxpayer bailout of banks, equity bail-in, risk-taking by banks, financial fragility

JEL Classification: G21, G28

Suggested Citation

Shy, Oz and Stenbacka, Rune, An Overlapping Generations Model of Taxpayer Bailouts of Banks (September 23, 2017). Available at SSRN: https://ssrn.com/abstract=2740352 or http://dx.doi.org/10.2139/ssrn.2740352

Oz Shy (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

HOME PAGE: http://https://www.frbatlanta.org/research/economists/shy-oz.aspx

Rune Stenbacka

Hanken School of Economics ( email )

P.O. Box 479
FI-00101 Helsinki, 00101
Finland
+35 89 4313 3433 (Phone)
+35 89 4313 3382 (Fax)

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