Inefficient Bank Recapitalization, Bailout, and Post-Crisis Recoveries

48 Pages Posted: 16 Oct 2020 Last revised: 28 Nov 2022

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Date Written: November 25, 2022


We study bailouts in a macroeconomic model where banks provide services that facilitate firms' investments but limit their own leverage to prevent costly recapitalizations. This precautionary motive can generate financial crises, in which banks' limited intermediation capacity discourages investments and dampens growth. Bank recapitalizations are constrained-inefficient because they do not internalize that, in the aggregate, higher equity buffers allow for more intermediation, favouring investments and accelerating recoveries. System-wide bailouts can mitigate this inefficiency and improve long-run welfare as long as their positive effect on banks' equity value outweighs their negative impact on risk-taking incentives.

Keywords: bailout; efficiency; financial crisis, general equilibrium; recovery; welfare

JEL Classification: D51, G21

Suggested Citation

Modena, Andrea, Inefficient Bank Recapitalization, Bailout, and Post-Crisis Recoveries (November 25, 2022). SAFE Working Paper No. 292, Available at SSRN: or

Andrea Modena (Contact Author)

University of Mannheim ( email )

L 7, 3-5
Mannheim, 68161
01601420817 (Phone)
60487 (Fax)

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