Journal of Applied Finance & Banking

Bailout Policies: Systemic Risk vs Moral Hazard

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• Abstract

   

  Given an imminent bank failure, central banks often face the dilemma of whether to rescue private banks (bailout) or let them bear the consequences of their mismanagement. This paper seeks to empirically analyze the philosophy of financial system regulators in light of systemic risk and moral hazard, with the aim of outlining the most relevant elements taken into account by central banks when evaluating whether or not to intervene to prevent the failure of a private bank. The research consists of studying some emblematic bailout cases from the last 20 years in the U.S. – Lehman Brothers and AIG (2008) and Silicon Valley Bank (2023) –, in Switzerland – Credit Suisse (2023) –, and in Brazil – Banco Pan (2010) and Banco Master (2024). Finally, it will analyze the regulators’ logic for granting a bailout aligned with the expected cost-effective outcome.

   

  JEL classification numbers: E-58, G-28, G-32, K-22.

  Keywords: Financial market regulation, Fed, Indebtedness, Bailout, Systemic risk, Moral hazard.