The political economy of bank bailouts

In this paper, we examine how the institutional design affects the outcome of bank bailout decisions. In the German savings bank sector, distress events can be resolved by local politicians or a state-level association. 
In this paper, we examine how the institutional design affects the outcome of bank bailout decisions. In the German savings bank sector, distress events can be resolved by local politicians or a state-level association. We show that decisions by local politicians with close links to the bank are distorted by personal considerations: While distress events per se are not related to the electoral cycle, the probability of local politicians injecting taxpayers’ money into a bank in distress is 30 percent lower in the year directly preceding an election. Using the electoral cycle as an instrument, we show that banks that are bailed out by local politicians experience less restructuring and perform considerably worse than banks that are supported by the savings bank association. Our findings illustrate that larger distance between banks and decision makers reduces distortions in the decision making process, which has implications for the design of bank regulation and supervision.
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Metadaten
Author:Markus Behn, Rainer Haselmann, Thomas Kick, Vikrant Vig
URN:urn:nbn:de:hebis:30:3-400652
URL:http://safe-frankfurt.de/fileadmin/user_upload/editor_common/Research/Working_Paper/SAFE_WP_133.pdf
Parent Title (English):SAFE working paper series ; No. 133
Series (Serial Number):SAFE working paper series (133)
Publisher:SAFE
Place of publication:Frankfurt am Main
Document Type:Working Paper
Language:English
Year of Completion:2016
Year of first Publication:2016
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2016/05/10
Tag:bailouts; elections; political economy; state-owned enterprises
Edition:April 14, 2016
Pagenumber:60
HeBIS PPN:381274640
Institutes:Wirtschaftswissenschaften
House of Finance (HoF)
Center for Financial Studies (CFS)
Sustainable Architecture for Finance in Europe (SAFE)
Dewey Decimal Classification:330 Wirtschaft
JEL-Classification:D72 Models of Political Processes: Rent-Seeking, Elections, Legislatures, and Voting Behavior
D73 Bureaucracy; Administrative Processes in Public Organizations; Corruption
G21 Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
G28 Government Policy and Regulation
Sammlungen:Universitätspublikationen
Licence (German):License Logo Veröffentlichungsvertrag für Publikationen

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