De Facto Bank Bailouts

Abstract

The U.S. government uses its voting power to direct IMF loans to countries where U.S.
banks are exposed to sovereign default—a de facto bailout. This effect is stronger in
years when the costs of direct bailouts are higher and is also found among major
European IMF members. We find that de facto bailouts reduce government incentives to
default and that U.S. Congressional voting on IMF funding is consistent with a private
interest view of government. Overall, we identify an alternative mechanism through which governments can backstop the losses of large multinational banks.

Keywords: sovereign defaults, bailouts, International Monetary Fund, political economy, U.S. banking

JEL Classification: F50, G15, G21, H81