De Facto Bank Bailouts

Abstract

We show that the likelihood a defaulting sovereign is granted an IMF loan is increasing in U.S. banks' exposure to that country. We argue the U.S. government uses its voting power in the IMF to direct IMF funds to countries where U.S. banks stand to lose the most from sovereign default -- a de facto bailout. Consistent with this, we show that (1) U.S. Congressional voting on IMF funding increases is consistent with special (banking) interests; and (2) U.S. bank stocks' market reaction to the announcement of an IMF loan increases with its exposure to the defaulting sovereign.

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

JEL Classification: F50, G15, G21, H81