Bailout
A bailout refers to financial assistance provided by a government or other organization to a struggling company or economy. This assistance is typically in the form of loans, grants, or other financial support to prevent the collapse of the entity in question. Bailouts are often controversial, as they involve using public funds to support private entities and can have significant economic and political implications.
5 Key excerpts on "Bailout"
eBook - ePub- Vikas Kumar, Gaurav Gupta, Vikas Kumar, Gaurav Gupta(Authors)
- 2021(Publication Date)
- Routledge(Publisher)
...Some countries like the UK and Spain improved their public healthcare system. It was also an opportunity to fix some other lacunas in public infrastructure like education and transportation systems and even the economic system and the financial system with the planned stimulus package (Ozili & Arun, 2020). This implies the attempts at development must not be restricted to the pre-COVID levels: the countries must try to reopen, rebuild and recreate the economy capable of surpassing the previous levels. To achieve these objectives the governments are going all out for Bailouts and other support mechanisms. Bailout and Government Support Bailout is an important tool of government support or intervention. Merriam-Webster defines Bailout as “a rescue from financial distress”. “Bailout is a general term for extending financial support to a company or a country facing a potential bankruptcy threat”. 20 Bailouts are a form of state intervention into the economy with significant redistributive effects. Primarily a Bailout is given to support an industry or a business that potentially affects millions of lives and is going through a prolonged financial crisis so acute that it may cause bankruptcy. Commonly loans, cash, bonds and stock purchases are used as instruments of Bailout. Sometimes even direct subsidies are provided to the parties concerned. 21 As they say there are no free lunches in the world, and the economist community repeatedly runs a disclaimer about the moral hazards and welfare-reducing effects of Bailout. The stimulus is financed by taxpayers’ money that would have been otherwise utilized to work on the infrastructure and environmental conservation and is now being utilized to bail out the industry, so it is the taxpayer who is financing the Bailout...
eBook - ePubTARP and other Bank Bailouts and Bail-Ins around the World
Connecting Wall Street, Main Street, and the Financial System
- Allen N. Berger, Raluca A. Roman(Authors)
- 2020(Publication Date)
- Academic Press(Publisher)
...We simply choose to treat them as Bailouts, as they are typically referred to in the literature. 4 Emerging countries during financial crises often rely for financial support on country Bailouts from international authorities such as the International Monetary Fund (IMF). Some of these funds are likely channeled to the banking sector. Similar to US Bailout evidence on TARP, a country's political connections positively affect the probability and size of the IMF Bailout (Barro and Lee, 2005), and IMF Bailouts have typically restored rather than reduced investor confidence during country financial crises (Wei, Zhang, and Du, 2010). However, effects of IMF Bailouts on moral hazard are mixed, with some papers finding reduced moral hazard (e.g., Eichengreen and Mody, 2001 ; Dell’Ariccia, Zettelmeyer, and Schnabel, 2002), while others find increased moral hazard (e.g., Dell’Ariccia, Zettelmeyer, and Schnabel, 2002 ; Lee and Shin (2008) ; Bernal, Oosterlinck, and Szafarz, 2010). Chapter 17 Empirical research on bail-ins Abstract Chapter 17 summarizes the empirical research findings on bail-ins, including OLA in the US. and BRRD in the EU. We also elaborate on research on contingent convertibles (CoCos), a form of bail-in used in some European nations. The chapter also briefly discusses other historical bail-in-like tools or episodes such as the double liability on shareholders, used by the regulators prior to the Great Depression. This required shareholders of failing institutions to come up with additional equity to compensate depositors. We also briefly discuss one significant earlier episode of the U.S. government dealing with a large, distressed financial institutions. The case of hedge fund Long-Term Capital Management (LTCM) in 1998 was a combination of a Bailout and bail-in in which the Federal Reserve Bank of New York helped arrange financing by a group of private-sector financial institutions...
eBook - ePubRestoring Financial Stability
How to Repair a Failed System
- Viral V. Acharya, Matthew P. Richardson, Viral V. Acharya, Matthew P. Richardson(Authors)
- 2009(Publication Date)
- Wiley(Publisher)
...PART Six The Bailout Thomas F. Cooley and Thomas Philippon P art Five has laid out our proposals for the prudential regulation of systemic financial risk, for the conduct of monetary policy, and for the design of lending facilities to deal with liquidity crises. These proposals were aimed at reducing the likelihood of a systemic crisis. Financial crises, however, are to some extent unavoidable. It is therefore important for contingency plans to be prepared, and, in that respect, we have much to learn from the current crisis. This is our focus in this part of the book. Drastic interventions might be needed if and when a liquidity crisis threatens to turn into a systemic solvency crisis, as it did in September and October 2008. It is crucial, however, to minimize the costs to the taxpayer and to limit opportunistic behavior by the institutions that are bailed out. In addition, market participants need to have some idea of how the Federal Reserve and the Treasury will respond when banks and financial firms get into trouble. This financial crisis has been upon us for more than a year, but we still have only the vaguest notion of what considerations drove the decisions that have been made. Our overall assessment is that the U.S. Bailout was ill-conceived from the start, both technically and strategically. It gave away taxpayer money, it was confused and inefficient, and in some respects it worsened the crisis. Chapter 15 (“The Financial Sector Bailout: Sowing the Seeds of the Next Crisis?”) focuses on the financial side of the Bailout. Since the intervention had to be quick, the tools to be used were loan guarantees and recapitalization. The critical issues are the pricing of the guarantees and the decision whether to make participation voluntary or compulsory. The U.S. financial Bailout has been too generous to the financial industry and too costly for taxpayers, and it lacks a clear exit plan...
eBook - ePub- John Raymond LaBrosse, Rodrigo Olivares-Caminal, Dalvinder Singh(Authors)
- 2020(Publication Date)
- Informa Law from Routledge(Publisher)
...This should give a Government-owned entity a commercial advantage (in the form of lower borrowing costs) and in theory Government-owned firms should drive privately owned competing firms funded at private rates out of business. It is reasonably well known that in real life exactly the opposite phenomenon is generally encountered and the reasons for this are outside the scope of this chapter. However the core point remains that a predominantly nationalised competitor in a market is a disruptive phenomenon. Thus nationalisation is a stage on the journey towards rescuing the system rather than an end in itself. THE EFFECT OF RESCUE – MORAL HAZARD, THE IMPLICIT GOVERNMENT GUARANTEE It is generally accepted that financial services is one of those industries where the externalities of its failure substantially exceed the actual losses of the immediate creditors. Put another way, there is a social benefit to preserving the financial system which must necessarily be taken into account by government contemplating a policy response to financial systemic failure. Put simply, where the financial system (as opposed to a single component of it) is threatened, government does not currently have the option of standing aside. It is this in turn which gives rise to what may be regarded as “moral hazard”. In this context what is meant by the term “moral hazard” is the idea that creditors may assume that their exposure to a particular bank is guaranteed (or effectively guaranteed) by the government. This may induce them not to scrutinise the business or management of a borrower, since they know that they will be seen right whatever happens...
- International Monetary Fund(Author)
- 2001(Publication Date)
- INTERNATIONAL MONETARY FUND(Publisher)
...Now, suppose that the Korean government had an additional $50 billion worth of reserves last December, it could then have done the Bailout on its own without coming to the international community or the fund. Thus, while the Korean government created a moral hazard problem when it guaranteed the flows through Korean banks, the availability of liquidity support when the government faced liquidity problems, was not the fundamental source of that moral hazard problem. Now you could say that it would be useful if the IMF and others were more forceful in seeking to have a system in which national governments were less generous and predictable in supporting weak banks and their creditors. I think that is right. But it is not just the IMF that could be doing that; also the BIS, the OECD, and the whole range of the economics profession should be doing it. I do not think that denying liquidity support, and forcing an even larger economic disaster on Korea than is already befalling it can plausibly be recommended as a rational way of dealing with this issue. Second, lessening the true economic damage associated with economic crises, and thereby lessening the perceived hazard of damage associated with such crises, does not necessarily imply the creation of moral hazard. The objective is not to make a crisis as large and costly as possible so that we can discourage all risk taking. We do not want to have central bankers that will create big recessions because that will make people be more cautious in their investments. To the extent that international support packages do reduce the true economic damage associated with economic crises, that is a good thing. And to the extent that people therefore perceive less risk that is also a good thing...
