Banking Crises and the Government Policy Dilemma

Posted: 24 Oct 2012

See all articles by Augusto Hasman

Augusto Hasman

École hôtelière de Lausanne; OFCE

Angel Luis Lopez

Autonomous University of Barcelona; IESE Business School

Margarita Samartin

Charles III University of Madrid

Date Written: March 22, 2012

Abstract

Intervention has taken different forms in different countries and periods of time. Moreover, the high interconnection of financial institutions makes the (implicitly or explicitly) promise of no intervention made by governments barely credible. Moreover, it is largely claimed that these interventions will intensify the riskiness of banks' investments when they are considered too big to fail. In this paper we address the problem of resolving banking crises from the government perspective, taking into account the fact that preventing banking crises is crucial for the government. The main idea of this paper is that "no rescue" is a no credible policy option. Then, the government, when analyzing the best policy response, considers the "no rescue" option just as a benchmark. In addition, we introduce the moral hazard problem, inherent in the banking system, and consider the interaction between regulation, policy measures and banks' behaviour. This is the first paper that compares different policy plans to resolve banking crises in an environment where insufficiently capitalized banks have incentives to take risk.

Keywords: Banking crises, capital requirements, government intervention, moral hazard

JEL Classification: G21, G28

Suggested Citation

Hasman, Augusto and Lopez, Angel Luis and Samartin, Margarita, Banking Crises and the Government Policy Dilemma (March 22, 2012). Proceedings of 18th International Business Research Conference 2012 , Available at SSRN: https://ssrn.com/abstract=2166462 or http://dx.doi.org/10.2139/ssrn.2166462

Augusto Hasman (Contact Author)

École hôtelière de Lausanne ( email )

Route de Cojonnex 18
Lausanne, Vaud 1000
Switzerland

OFCE ( email )

69 Quai d'Orsay
Paris 75004
France

Angel Luis Lopez

Autonomous University of Barcelona ( email )

Plaça Cívica
Cerdañola del Valles
Barcelona, Barcelona 08193
Spain
34935811528 (Fax)

HOME PAGE: http://angelluislopez.net

IESE Business School

Avenida Pearson 21
Barcelona, 08034
Spain
+ 34 932534200 (ext. 4554) (Phone)

HOME PAGE: http://www.angelluislopez.net

Margarita Samartin

Charles III University of Madrid ( email )

CL. de Madrid 126
Madrid, Madrid 28903
Spain

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