Bagehot or Bailout? An Analysis of Government Responses to Banking Crises

Abstract

Political intervention into markets can take a nearly endless number of forms. During the latter part of the twentieth century, there was a widely shared sense that governments should decrease their role in the economy. Still, there were important variations in this trend. In response to onerous banking crises, countries chose policies that varied dramatically between rescuing insolvent banks (Bailout) and enforcing bank closures (Bagehot). Bailouts are often portrayed as regressive wealth transfers from taxpayers to bankers as the result of "crony capitalism." However, government policy choice may be patterned as much by domestic institutions-political regime and central bank autonomy-and international constraints-economic openness and support from international financial institutions-as by political promises to stand by crony allies in hard times. I test these arguments by fitting a Bayesian hierarchical item response model of policy making that takes full advantage of data on government responses to banking crises.

Après le déluge: Institutions, the Global Financial Crisis, and Bank Profitability in Transition

“…Based on an analysis of emerging economies, Rodríguez and Santiso (2008) find that banks do indeed prefer, based on their lending patterns, stable emergent democracies (although their analysis neglects the issue of bank profitability). On the other hand, democracies, especially in the throes of a crisis, are prone to fits of populism and bad economics (Przeworski and Limongi 1993), perhaps creating a popular desire for bailouts to save banks in particular (although Rosas (2006) found the opposite, in that democratic regimes tend to rely on bank closures more on average than bank bailouts). In direct relation to bank profitability, populism could also go the other way, as public clamors for additional regulation and policies could directly strike at the bottom line for any one particular bank.…”

Preventing German Bank Failures: Federalism and decisions to save troubled banks

“…He also finds that less electorally competitive countries are more likely to use forbearance with troubled banks. Similarly, Rosas (2006Rosas ( , 2009 finds that democracies are more likely to use what he calls "bagehot" policies, such as providing shortterm liquidity support backed by good collateral, to aid sound banks while imposing costs on and closing troubled banks. Autocracies are more likely to use costly bailouts that favor narrow banking interests.…”

“…These include industry capture and crony capitalism (Rosas 2006), regulators' reputations and postpublic service employment prospects (Kane 1989), bureaucratic capacity (Satyanath 2006, p. 18), veto players (Alesina and Drazen 1991; MacIntyre 2001; Satyanath 2006, information games played between regulators and politicians (Gandrud and O'Keeffe 2013), how bargaining is structured between banks and governments (Grossman andWoll 2014; Woll 2014), and political institutions such as democracy and electoral competitiveness (Keefer 2007; Rosas 2006 along with their interaction with interest groupstate coalitions (Calomiris and Haber 2014). However, none of these approaches explain which and what types of banks are saved.…”

Information and Financial Crisis Policymaking

“…they gamble for resurrection (Downs and Rocke, 1994). Politicians with cronyistic ties to bankers are more likely to use bailouts at the expense of di↵use public interests such as taxpayers (Rosas, 2006). The crony capitalism theory expects decision-makers with close ties to the banking sector to pursue policies that maintain the solvency of banks even at substantial public expense.…”

“…Our article makes an important contribution to the growing literature on the political economy of public responses to banking crises (see Alesina and Drazen, 1991;Grossman and Woll, 2014;Keefer, 2007;Pepinsky, 2014;Rodrik, 1999;Rosas, 2006Rosas, , 2009Weber and Schmitz, 2011;Woll, 2014). We use a signalling game framework to understand how information asymmetries between political decisionmakers and bureaucrats shape initial crisis responses.…”