Bailouts of Systemically Relevant Banks Do Not Create Moral Hazard

8 Pages Posted: 16 Jul 2016

See all articles by Urs Birchler

Urs Birchler

University of Zurich - Faculty of Economics, Business Administration and Information Technology

Date Written: July 16, 2016

Abstract

Many economists and policy-makers believe that bailouts of systemically important financial institutions (SIFIs), though unavoidable ex post, are inefficient ex ante: The expectation of such bailouts is said to lead to moral hazard in the form of excessive risk taking. We argue that this view may be true for non-systemically relevant banks, but misleading for SIFIs. To the degree that an institution neglects the systemic damage of its potential failure it will take excessive risk even under laissez-faire, i.e., in the absence of a state and hence of bailouts. Bailouts of such institutions, even if anticipated ex ante, are likely to reduce moral hazard.

Keywords: Banking, Bailout, SIFIs, Financial Stability, Incentives

JEL Classification: G21, G28, C72, C73, L51

Suggested Citation

Birchler, Urs, Bailouts of Systemically Relevant Banks Do Not Create Moral Hazard (July 16, 2016). Available at SSRN: https://ssrn.com/abstract=2810393 or http://dx.doi.org/10.2139/ssrn.2810393

Urs Birchler (Contact Author)

University of Zurich - Faculty of Economics, Business Administration and Information Technology ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland
+41 44 631 29 52 (Phone)

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