Bank Bailouts Moral Hazard vs. Value Effect

30 Pages Posted: 15 Feb 2006

See all articles by Tito Cordella

Tito Cordella

Johns Hopkins University - Bologna Center

Eduardo Levy Levy-Yeyati

Universidad Torcuato Di Tella - School of Business

Date Written: August 1999

Abstract

This paper shows that a central bank, by announcing and committing ex-ante to a bailout policy that is contingent on the realization of certain states of nature (for example on the occurrence of an adverse macroeconomic shock), creates a risk-reducing "value effect" that more than outweighs the moral hazard component of such a policy.

Keywords: banks risk bailout lender of last resort value effect moral hazard

JEL Classification: D82 E44 E58

Suggested Citation

Cordella, Tito and Levy-Yeyati, Eduardo Levy, Bank Bailouts Moral Hazard vs. Value Effect (August 1999). IMF Working Paper No. 99/106, Available at SSRN: https://ssrn.com/abstract=880633

Tito Cordella (Contact Author)

Johns Hopkins University - Bologna Center ( email )

Via Belmeloro 11
40126 Bologna
Italy

Eduardo Levy Levy-Yeyati

Universidad Torcuato Di Tella - School of Business ( email )

Saenz Valiente 1010
C1428BIJ Buenos Aires
Argentina

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