## Bailouts and Systemic Insurance

_IMF Working Papers, November 12, 2013_

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**Canonical URL:** [Bailouts and Systemic Insurance](https://www.imf.org/en/publications/wp/issues/2016/12/31/bailouts-and-systemic-insurance-41048)

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## Bibliographic details
- Authors: Giovanni Dell'Ariccia, Lev Ratnovski
- Published: November 12, 2013
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475514742.001

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### Summary findings
- The expectation of government support to failing banks creates moral hazard—increases bank risk taking.
- When a bank’s success depends on both its effort and the overall stability of the banking system, a government’s commitment to shield banks from contagion may increase their incentives to invest prudently and so reduce bank risk taking.
- The systemic insurance effect will be relatively more important when bailout rents are low and the risk of contagion (upon a bank failure) is high.
- The optimal policy may then be not to try to avoid bailouts, but to make them “effective”: associated with lower rents.

### Policy implications and recommendations
- Recognize the trade-off between moral hazard from bailout expectations and systemic insurance benefits from commitments to limit contagion.
- Where contagion risk is high and bailout rents are low, policymakers may prefer making bailouts effective (linked to lower rents) rather than strictly avoiding bailouts.
- Design resolution and support frameworks to minimize rents extracted by banks while preserving systemic insurance benefits.

### Analytical scope and themes
- Reexamines link between bailouts and bank risk taking.
- Focuses on interactions among bank effort, bank portfolio choice, and overall banking system stability.
- Addresses moral hazard, systemic risk, contagion, bank monitoring, bank resolution, and related financial sector policy concerns.

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/bailouts-and-systemic-insurance-41048_