Andrea Modena (University of Bonn, Università Ca’ Foscari Venezia) (webinar)

“Recapitalization, Bailout, and Long-run Welfare in a Dynamic Model of Banking”

Abstract: We study the trade-off between the short-run costs and the long-run benefits of bank bailouts. In the model, banks leverage, thanks to their cost advantage at monitoring firms, but hold precautionary capital buffers to avoid costly equity issuance. Banks’ recapitalization is suboptimal because they do not internalize the externalities of the banking sector’s relative size on their individual leverage capacity and firms’ investments. Systematic bailouts can improve the allocation efficiency in bad states, in which banks’ leverage is persistently constrained and investments are low. In the long run, bailouts accelerate the economy’s recovery by fostering growth, thereby reducing endogenous risk.

Zoom link:

https://us02web.zoom.us/j/83596624662?pwd=ZmlvenJSbGJVZjl4WTA0MnNMUXVlZz09

Meeting ID: 835 9662 4662 Passcode: 056057