How a Bank Bailout may Increase Systemic Risk |
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Authors: | Victoria Miller |
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Affiliation: | 1. UQAM , Montreal , Canada miller.victoria@uqam.ca |
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Abstract: | In 2008–2009, the US government spent trillions of dollars to bailout its financial system and prevent insolvency due to a deterioration in domestic loan portfolios. The following dips in US bond prices suggest that global investors feared that the US was over-extending itself and might be unable to repay its debt with taxes rather than inflation. The paper illustrates that if uncertainty arises about a large government's ability to raise taxes to repay its debt, then a debt-financed bailout which initially restores bank health may inadvertently contribute to the financial system's ultimate demise if banks are important lenders to a foreign country that pegs its currency to the domestic money. |
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Keywords: | Bank bailouts insolvency fixed exchange rates |
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