We revisit the link between bailouts and bank risk taking. Bailout expectations create moral hazard – increase bank risk taking. However, when an individual bank’s success depends on both its effort and the overall stability of the banking system, bailouts that shield banks from contagion may increase their incentives to invest prudently and so reduce bank risk taking. This systemic insurance effect is more important when bailout rents are low while contagion risk is high. The optimal policy is then to make bailouts not difficult, but “effective” : associated with lower rents. We further show that, besides better bank resolution, a powerful means to reduce bailout rents is higher ex ante bank capital, since it implies a larger bank equity cushion that can be expropriated in a resolution. This highlights an important complementarity between bank capital regulation and bailouts as tools to enhance financial stability.

We identify different sources of risk as important determinants of banks' corporate structures when expanding into new markets. Subsidiary‐based corporate structures benefit from greater protection against economic risk because of affiliate‐level limited liability, but are more exposed to the risk of capital expropriation than are branches. Thus, branch‐based structures are preferred to subsidiary‐based structures when expropriation risk is high relative to economic risk, and vice versa. Greater cross‐country risk correlation and more accurate pricing of risk by investors reduce the differences between the two structures. Furthermore, a bank's corporate structure affects its risk taking and affiliate size.

Banking crises are usually followed by low credit and GDP growth. Is this because crises tend to take place during economic downturns, or do banking sector problems have independent negative real effects? If banking crises exogenously hinder real activity, then sectors more dependent on external finance should perform relatively worse during banking crises. The evidence in this paper supports this view. The differential effects across sectors are stronger in developing countries, in countries with less access to foreign finance, and where banking crises were more severe. Robustness checks include controlling for recessions, currency crises, and alternative proxies for bank dependence.