A B S T R A C TIn the aftermath of the recent financial crisis, several countries implemented a bank levy. This paper studies the impact of different types of bank levies on the risk-taking behaviour of banks competing in the market for secured or unsecured debt à la Hotelling. We differentiate between three types of bank levies: a levy on secured liabilities, a levy on unsecured liabilities and a levy on risk-weighted assets. Banks collect funds and invest in either a prudent or a gambling asset. We find that a levy on secured and unsecured liabilities can prevent banks from investing in the gambling asset. A levy on risk-weighted assets also induces banks to behave more prudently. Such a levy is even more effective than a levy on liabilities if banks are wellcapitalized. Finally, a guarantee on debt makes a bank levy more effective.
Banking crisis resolution is often a long-lasting process with large fiscal and social costs. We ask which difficulties authorities face when choosing and implementing resolution packages. We survey the literature analyzing the impact of single resolution instruments on moral hazard and fiscal costs. We argue that no best-practice resolution package exists and that the implementation of a package is subject to coordination failures. Since crisis resolution packages are countryspecific, we follow a case-study approach and describe how regulators in Japan and the Nordic countries during the 1990s solved their financial crises. We identify several obstacles the authorities in these countries were faced with and analyse their crisis resolution in the context of moral hazard and fiscal costs. Finally, we use these lessons to reassess the policy reactions in the US and in Europe during the recent financial crisis.Keywords Banking crisis Á Resolution instruments Á Lender of last resort Á Owner of last resort Á Political coase theorem
SummaryBased on the model of Cordella and Yeyati (2003) this paper compares the effect of several bailout strategies of a „lender of last resort“ (LoLR) on a bank’s risk behaviour. We show that both „constructed ambiguity“, defined as a properly mixed strategy, and a pure strategy where a LoLR rescues always or never are not the optimal strategies. The LoLR should rather apply a contingent rule which means that he should announce and commit ex ante to a bailout policy depending on a verifiable state of nature. For this reason the optimal bailout policy should not be case by case, but follow an ex ante defined rule. Consequently, there is no contradiction between incentive efficiency and transparency of an efficient LoLR-policy.
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