The evolution of bank bailout policy: two centuries of variation, selection and retention

Abstract

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The Banking Union and evidence on bail‐ins and bailouts

“…FDIC assistance comprises three different transaction types, one of which—designated open bank assistance—is designed to ‘prevent the bank from failing […] under certain circumstances […] regardless of the cost’ (Sprague, 1986, p. 22). That is, the failing bank is kept open through an FDIC bailout that can include recapitalization measures, loans and loan guarantees (Bennett & Unal, 2015; McDonagh, 2021; Sprague, 1986). The Banking Union does not foresee comparable bailout or recapitalization instruments.…”

“…Other researchers have pointed to the costs and risks of resolution (Admati, 2014; Avgouleas & Goodhart, 2015; Cochrane, 2014; Skeel, 2010) or favourable experiences with recapitalization measures that target solvent banks (Calomiris & Khan, 2015; Calomiris & Mason, 2004; Calomiris et al, 2005; Lucas, 2019; McDonagh, 2021; Veronesi & Zingales, 2010). Berger et al (2016) find evidence that regulatory interventions (e.g., prompt corrective action and bail‐ins) reduce liquidity creation (including credit creation), whereas recapitalizations do not and that both reduce bank risk‐taking.…”

Credit Guidance for a Desired Economy: An Original Institutional Economics Critique of Financialization

“…This massive shorting of the securities market significantly compounded the subprime losses for financial institutions globally and destroyed confidence in the system, resulting in a global breakdown of financial flows (Swedberg 2010). While 2008 was novel in its scale, it was not novel in nature, given that financial crises driven by speculation are ubiquitous throughout capitalist history (McDonagh 2020).…”