kaal:claim:1998455-002

The implicit guarantees contained in a bailout multiply the incentives for systemically important financial institutions to increase leverage, because those guarantees make debt cheaper than equity.

Source quote, verbatim

The implicit guarantees in a bailout may also multiply the incentives for SIFIs to increase leverage because the guarantees could make debt cheaper than equity.

From

Wulf A. Kaal, Initial Reflections on the Possible Application of Contingent Capital in Corporate Governance (2012), I. Introduction, p. 5
https://ssrn.com/abstract=1998455 · source PDF

Cite as

Wulf A. Kaal, Initial Reflections on the Possible Application of Contingent Capital in Corporate Governance (2012). SSRN: https://ssrn.com/abstract=1998455

Holds when

where market participants expect governments to bail out systemically important firms

Classification

mechanismsupport: arguedfailure: guarantee-induced-leveragefamily: moral-hazard-and-bailout-expectationsystemic-riskrisk-and-incentives

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