TARP 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

• Publisher: Academic Press
• Year: 2020
• ISBN:
  9780128138656
• Topic: Business
• Subtopic: Finanza
• Index: Business

Financial crises are recurring phenomena that result in the financial distress of systemically important banks, making it imperative to understand how to best respond to such crises and their consequences. Two policy responses became prominent for dealing with these distressed institutions since the last Global Financial Crisis: bailouts and bail-ins. The main questions surrounding these responses touch everyone: Are bailouts or bail-ins good for the financial system and the real economy? Is it essential to save distressed financial institutions by putting taxpayer money at risk in bailouts, or is it better to use private money in bail-ins instead? Are there better options, such as first lines of defense that help prevent such distress in the first place? Can countercyclical prudential and monetary policies lessen the likelihood and severity of the financial crises that often bring about this distress? Through careful analysis, authors Berger and Roman review and critically assess the extant theoretical and empirical research on many resolution approaches and tools. Placing special emphasis on lessons learned from one of the biggest bailouts of all time, the Troubled Asset Relief Program (TARP), while also reviewing other programs and tools, TARP and Other Bank Bailouts and Bail-Ins around the World sheds light on how best to protect the financial system on Wall Street and the real economy on Main Street.

• Presents a well-informed and rich account of bailouts, bail-ins, and other resolution approaches to resolve financially distressed banks.
• Uses TARP as a key case study of bailouts that has been thoroughly researched.
• Provides valuable research and policy guidance for dealing with future financial crises.

Part I

Introductory materials

Outline

Introduction to Part I

Chapter 1. Introduction to bank bailouts, bail-ins and related topics covered in the book

Chapter 2. Conditions that generally bring about bank bailouts, bail-ins, and other resolution methods

Chapter 3. Descriptions of TARP, other bank bailouts and bail-ins, and other resolution approaches in the US and around the world

Chapter 4. Theoretical background on bank bailouts, bail-ins, and other resolution approaches

Part 1 Introductory materials

Introduction to Part I

This book reviews and critically assesses the theoretical and empirical research evidence on the Troubled Asset Relief Program (TARP) in the United States (US) and other bank bailouts and bail-ins in the US and around the world. Bank bailouts generally involve putting taxpayer funds at risk to rescue banks, while bail-ins require private sector agents to provide the capital. We assess the important costs and benefits of these programs, and suggest potential policy implications for prospective future bailouts and bail-ins.

We take a holistic approach in this book with much broader goals than just evaluating bailouts and bail-ins, which are not the only policy choices. We also consider other resolution options, including bankruptcy/failure, in which the bank holding company (BHC) that owns the bank goes bankrupt and the bank fails; living wills, in which the bank is saved by reorganizing and/or selling off less important subsidiaries of the BHC; forbearance, in which banks continue operations with little or no capital; and breaking up large and complex institutions into either smaller banks or separate commercial and investment banks.

We also evaluate other options for policymakers to help prevent the needs for bailouts, bail-ins, or other resolution methods in the first place. We call one set of such policies “first lines of defense,” which help avoid the need for bank resolution by keeping the banks out of individual financial distress. We discuss and evaluate the research on seven such policies in the book, capital requirements, liquidity requirements, stress tests, prudential regulatory activity restrictions, prudential supervision, deposit insurance, and direct government bank ownership.

We also describe in the book research on a second set of policies designed to lessen the incidence of financial distress on an aggregate level. This involves reducing the likelihood and severity of financial crises through countercyclical prudential policy actions that lean against lending booms and excessive aggregate bank liquidity creation. In addition, countercyclical conventional monetary policy can also help lessen the financial and economic excesses that might otherwise increase the probability and intensity of financial crises.

Finally, we evaluate the social costs and benefits of all of these 16 different policy tools, draw policy implications, and provide suggestions for future research to help with understanding bailouts, bail-ins, and other resolution methods, first lines of defense, and countercyclical prudential and monetary policies.

There are five parts to the book, each containing a different number of chapters. For each of the five parts, we provide an introduction that briefly describes that part and includes a virtual “tree of knowledge.” The leaves of the trees show the topics of the chapters in that part of the book, as well as the “fruits of knowledge,” the key references that supplied the knowledge in these chapters. Without these “fruits” provided by the many authors cited in the book, there would be no body of knowledge about the topics covered by the book and no book itself. We thank these authors for their contributions.

Part I contains introductory materials and includes four chapters. Chapter 1 provides an introduction to bank bailouts, bail-ins, and the related topics covered in the book. It also briefly summarizes Parts II, III, IV, and V, and includes brief summaries of the chapters in all five parts of the book. Chapter 2 discusses the conditions that generally bring about bank bailouts, bail-ins, and other types of bank resolution. These conditions usually involve financial crises and/or the financial distress of certain banks that are considered too important to the economy and/or financial system to be allowed to fail. The chapter also analyzes some research on the underlying causes of financial crises and the distress of these important banks. Chapter 3 describes the TARP program, other bank bailouts and bail-ins in the US and around the world, as well as the other resolution methods. Chapter 4 completes the introductory materials by giving the theoretical background on bank bailouts, bail-ins, and these other resolution approaches.

Part II discusses the relatively large extant empirical research literature on TARP and may serve as a primer or mini-textbook on TARP bailouts. The 11 chapters of Part II each describe a different aspect of the research, most of them focusing on a particular consequence of the program. Part III provides three chapters that review the empirical research on bailouts other than TARP, bail-ins, and other resolution approaches, respectively. Part IV describes first lines of defense to help avoid the need for bank resolutions. The seven chapters in Part IV provide a relatively comprehensive review of prudential banking policies around the world and may also serve as a primer or mini-textbook on this topic for interested readers. Part V looks to the future with three final chapters that discuss the net social costs and benefits of the various resolution approaches, lines of defense, and countercyclical policy implications of the research, the policy implications from this research, and the research questions that remain open, respectively.

Chapter 1

Introduction to bank bailouts, bail-ins and related topics covered in the book

Abstract

This chapter introduces the topics of the book and summarizes all of the other chapters. We take the broadest possible view of what constitutes a bailout or bail-in in order to ensure that we leave no stone unturned. We also cover methods to reduce the need for such costly procedures. We place a large focus on the Troubled Asset Relief Program (TARP) bailout because of its importance and depth of research, but the coverage of other alternatives is quite extensive.

Keywords

Bail-ins; Bailouts; Bankruptcy/Failure; Break-Ups; Conditions; Financial crises; First lines of defense; Living wills; OLA; Regulatory forbearance; Resolution approaches; Summary; TARP

Bank bailouts occur when governments, central banks, or other public national or international organizations supported by governments—such as the International Monetary Fund (IMF), the European Commission, and the European Stability Mechanism (ESM)—provide assistance to banks during times of financial distress beyond the support given in normal circumstances. The assista...