Working Paper: NBER ID: w16787
Authors: Santiago Carbovalverde; Edward J. Kane; Francisco Rodriguez-Fernandez
Abstract: This paper models and estimates ex ante safety-net benefits at a sample of large banks in US and Europe during 2003-2008. Our results suggest that difficult-to-fail and unwind (DFU) banks enjoyed substantially higher ex ante benefits than other institutions. Safety-net benefits prove significantly larger for DFU firms in Europe and bailout decisions less driven by asset size than in the US. We also find that a proxy for regulatory capture helps to explain bailout decisions in Europe. A policy implication of our findings is that authorities could better contain safety-net benefits if they refocused their information systems on measuring volatility as well as capital.
Keywords: safety-net; financial crisis; bailout; systemic risk; regulatory capture
JEL Codes: G01; G2; G21; G28; G38; K2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| difficult-to-fail and unwind (DFU) banks (G33) | ex ante safety-net benefits (H55) |
| regulatory capture (G18) | bailout decisions in Europe (H81) |
| improved information systems (L86) | reduced safety-net benefits (I38) |