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://www.frbatlanta.org/research/economists/shy-oz.aspx?panel=1

Rune Stenbacka

Hanken School of Economics ( email )

P.O. Box 479
Arkadiankatu 22
Helsinki, Helsinki 00101
Finland

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
115
Abstract Views
1,374
Rank
423,331
PlumX Metrics