# kaal:claim:1998455-002

**Claim.** 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.

**Type.** mechanism  **Support.** argued

**Holds when.**

- where market participants expect governments to bail out systemically important firms

**Source quote.**

> 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, page 5

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

**Verify.** sha256 of source PDF `1c16ff10a284469ba15fb7ba5523449b917388ee692d9b394f9e8c094544e32c` at https://raw.githubusercontent.com/wulfkaal/Academic-Papers/main/papers/pdf/Kaal%20-%202012%20-%20Initial%20Reflections%20on%20the%20Possible%20Application%20of%20Contingent%20Capital%20in%20Corporate%20Governance.pdf

**Failure mode.** guarantee-induced-leverage  (family: moral-hazard-and-bailout-expectation)

**Topics.** systemic-risk, risk-and-incentives

**Keywords.** bailouts, leverage, implicit-guarantees, capital-structure, moral-hazard

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