Bank Bailouts Moral Hazard vs. Value Effect
30 Pages Posted: 15 Feb 2006
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: Suggested Citation
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