Template-Type: ReDIF-Paper 1.0
Title: Inefficient Bank Recapitalization, Bailout and Post-Crisis Recoveries
Author-Name: Andrea Modena
Author-Email: andrea.modena@uni-mannheim.de
Classification-JEL: D51, G21
Keywords: bailout, efficiency, financial crisis, general equilibrium, recovery, welfare

Abstract: We study bailouts in a macroeconomic model where banks provide services that
facilitate firms’ investments but limit their own leverage to prevent costly recapitalizations.
This precautionary motive can generate financial crises, in which banks’
limited intermediation capacity discourages investments and dampens growth. Bank
recapitalizations are constrained-inefficient because they do not internalize that, in the
aggregate, higher equity buffers allow for more intermediation, favouring investments
and accelerating recoveries. System-wide bailouts can mitigate this inefficiency and improve
long-run welfare as long as their positive effect on banks’ equity value outweighs
their negative impact on risk-taking incentives.

Note: 
Length: 48
Creation-Date: 2023-04
Revision-Date: 
File-URL: https://www.crctr224.de/research/discussion-papers/archive/dp415
File-Format: application/pdf
Handle: RePEc:bon:boncrc:CRCTR224_2023_415