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Catch, Restrict, and Release: The Real Story of Bank Bailouts

Allen N. Berger¹; Simona Nistor²; Steven Ongena³; Sergey Tsyplakov⁴

¹ Darla Moore School of Business, University of South Carolina and Wharton Financial Institutions Center, United States and European Banking Center , · ² Babeş-Bolyai University of Cluj-Napoca , · ³ University of Zürich and Swiss Finance Institute, Switzerland, KU Leuven, Belgium, NTNU Business School, Norway, and CEPR , · ⁴ Darla Moore School of Business, University of South Carolina, United States, and International College of Economics and Finance, the HSE University ,

Bank bailouts are not “one-shot” events, as often portrayed, but rather dynamic processes with phases over time. Regulators “catch” financially distressed banks and provide aid, “restrict” these banks’ activities for ex ante unknown lengths of time, and then “release” the banks from the restrictions when capital ratios reach sufficiently healthy levels. This catch-restrict-release bailout approach is employed globally and applies to both major bailout methods capital injections (CIs) and debt guarantees (DGs). We model how a regulator that maximizes a social welfare function that includes the value of the bank and expected costs to the rest of the financial system and the real economy of its default might design and implement catch-restrict-release and test model predictions. Our data laboratory includes multiple EU nations over the financially stressful 2008-2014 period when many bailouts occurred. Findings suggest regulators bail out banks in a qualitatively consistent fashion with maximizing the social welfare function, yielding policy implications and directions for future research. (JEL G01, G21, G28, H81)

DOI

10.1093/rcfs/cfaf001

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en

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