Competition and Welfare Effects of Bailout Policies
Cred Working Paper No 2019–21
33 Pages Posted: 20 Jun 2019
Date Written: June 12, 2019
In this paper, we analyze the welfare effects of bailout policies when banks compete with switching costs. We compare no-bailout policies to systematic bailouts. We argue that no-bailout policies increase the interest rates paid by borrowers ex ante (i.e., before a shock), whereas they may reduce the interest rates paid by consumers who are not credit constrained ex post. Such policies increase social welfare ex post if borrowers can easily switch banks and if the credit constraints are not too severe.
Keywords: Bailout, Bank Failure, Switching Costs, Resolution Policies
JEL Classification: L1, L5, G2
Suggested Citation: Suggested Citation