A thing I sometimes enjoy is reading research papers examining questions like:
- if you are a bank, and you are likely to be bailed out, do you take more risks than a bank all on its lonesome, and
- once you’ve been bailed out, what then?
We’ve looked at a BIS paper on international banks, which on certain assumptions found that (1) banks that were in fact bailed out took more risks pre-bailout than banks that weren’t (unsurprising) and (2) after the bailouts they pretty much stayed riskier (maybe surprising). And then there was a Fed paper about TARP banks, which on certain different assumptions found sort of the same results.
Anyway in the spirit of completism and also charts here is a Bank of Canada paper:
“Supported” banks seem to have been a wee bit less risky than regular banks before the crisis, and quite a bit less risky afterwards, somewhat contradicting those other findings. Here is a stab at an explanation: Read more »