Prudential policies and bailouts – a delicate interaction

This paper calls attention to the non-trivial (and sometimes pervasive) effects of ex-ante policies, such as prudential policies, on banks' risk taking through their effects on the ex-post incentives to bailouts when the authority lacks commitment. The key insight is that ex-ante policies work...

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Bibliographic Details
Published in:Review of economic dynamics 2020-10, Vol.38, p.181-197
Main Author: Pasten, Ernesto
Format: Article
Language:English
Subjects:
Bailouts
Lack of commitment problem
Monetary policy
Prudential Policy
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Summary:This paper calls attention to the non-trivial (and sometimes pervasive) effects of ex-ante policies, such as prudential policies, on banks' risk taking through their effects on the ex-post incentives to bailouts when the authority lacks commitment. The key insight is that ex-ante policies work as predetermined variables that affect the benefit and cost involved in a bailout decision. In particular, liquidity requirements, a crisis resolution fund and prudential taxes are examples of policies that may backfire. Conversely, public debt is an example of an ex-ante policy usually with no prudential motivation that may play such a role.
ISSN:1094-2025
1096-6099
DOI:10.1016/j.red.2020.04.003