State Aids to the Banking Sector: Rescuing Some Harms Others'

Documentos de Economía "la Caixa", No. 13, April 2009

27 Pages Posted: 11 Jun 2009

See all articles by Sandra Jodar-Rosell

Sandra Jodar-Rosell

La Caixa

Jordi Gual

University of Navarra - IESE Business School; VidaCaixa; Centre for Economic Policy Research (CEPR)

Date Written: April 1, 2009

Abstract

Given the extreme uncertainty surrounding financial markets, there are strong efficiency reasons to justify the use public funds for guarantee schemes and precautionary recapitalisations of fundamentally sound financial institutions. The former tackle the severe asymmetric information problems between financial institutions and their creditors. The latter allow these institutions to restore their desired level of buffer capital without neither constraining their lending capacity, which could prevent the execution of profitable projects, nor triggering a fire-sale of assets that could have systemic consequences. However, these precautionary recapitalisations pose serious competition problems that the European Commission has not been able to address. On the one hand, this kind of state aid distorts the relative risk between recipient and non-recipient institutions, raising the costs of long-term funding for the latter. On the other hand, it better equips the recipient institutions with funds to implement aggressive strategies that are profitable only in the long run and thus, it distorts competition in the retail and corporate banking markets.

Keywords: state aids, banking competition, financial crisis

JEL Classification: H20, L50, G21, G28

Suggested Citation

Jodar-Rosell, Sandra and Gual, Jordi, State Aids to the Banking Sector: Rescuing Some Harms Others' (April 1, 2009). Documentos de Economía "la Caixa", No. 13, April 2009, Available at SSRN: https://ssrn.com/abstract=1417351 or http://dx.doi.org/10.2139/ssrn.1417351

Sandra Jodar-Rosell (Contact Author)

La Caixa ( email )

Av Diagonal 629
Barcelona, 08028
Spain

Jordi Gual

University of Navarra - IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain
+34 3 253 4200 (Phone)
+34 3 253 4343 (Fax)

VidaCaixa ( email )

Av Juan Gris 3-8
Barcelona, 08014
Spain

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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