Banks, Bailout Guarantees, and Risky Debt

Aaron Tornell

in Governance, Regulation, and Privatization in the Asia-Pacific Region

Published by University of Chicago Press

Published in print March 2004 | ISBN: 9780226386799
Published online February 2013 | e-ISBN: 9780226386966 | DOI:
Banks, Bailout Guarantees, and Risky Debt

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This chapter analyzes the role of bailout guarantees that accompany bank privatization and financial liberalization in many episodes over the past decade. It argues that where firms are constrained in bank credit, bailout guarantees can encourage banks to lend and enhance long-run growth, provided that they are accompanied by appropriate policies, such as undertaking bailouts only in cases of systemic crisis and establishing an efficient regulatory framework. The cost of pursuing higher long-run growth is an increased vulnerability to crises. However, the chance of an actual crisis should be small to avoid the unintended effect of reducing productive investment. The model analysis is accompanied by a case of policy dilemma caused by the Mexican banking crisis that followed the currency crisis of 1994–1995. Two commentaries are also included at the end of the chapter.

Keywords: bailout guarantees; bank privatization; liberation; lending; Mexican banking crisis

Chapter.  12099 words.  Illustrated.

Subjects: Business and Management

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