Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/233285 
Authors: 
Year of Publication: 
2011
Series/Report no.: 
Discussion paper No. 69
Publisher: 
Aboa Centre for Economics (ACE), Turku
Abstract: 
The paper investigates the optimal design of bank bailouts. Under three types of ex post moral hazard that tempt banks to hide loan losses, the paper analyzes banking regulation via three Prompt Corrective Action instruments: prohibition of dividends, limits on compensation to managers and early closure policy. The first two have a mitigating effort on moral hazard but the last instrument has a damaging impact. As to bad debts and the cleaning of banks' balance sheets, asset insurance and equity capital motivate banks to disclose loan losses. In some cases, prohibition of dividends or limits on compensation to managers has the same effect.
Subjects: 
Financial intermediation
Mechanism design
Bank bailouts
Banking regulation
Prompt Corrective Action
JEL: 
G21
G28
Document Type: 
Working Paper

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