Cover

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Frontmatter

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Contents

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List of Tables

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p. ix

List of Figures

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p. x

List of Acronyms

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pp. xi-xii

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Preface and Acknowledgments

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pp. xiii-xiv

As I write these words, many countries face recession following a protracted period of financial turmoil in the core economies of the world. An economic crisis of truly global proportion started as the seemingly unstoppable upward trend in home prices in the United States halted and abruptly changed direction over the past couple of years...

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1 Bagehot or Bailout? Policy Responses to Banking Crises

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pp. 1-17

On September 14, 2007, following the announcement that the Bank of England would provide liquidity support to Northern Rock, jittery depositors of this financial institution started long queues outside its main branches to withdraw their savings. A few months later, on February 17, 2008, British taxpayers woke...

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2 Accidents Waiting to Happen

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pp. 18-29

Banks are in business to lend money for the promise of future payment. Consequently, their solvency status at any point in time depends on the ability of bank debtors to honor payment of their loans. Though banks make loans with expected positive returns, even calculated risks may eventually lead to dire results. Despite the...

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3 Political Regimes, Bank Insolvency, and Closure Rules

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pp. 30-61

The commitment to enforce the exit of insolvent banks is an important conduit through which the political process affects an economy’s banking system. Under ideal conditions, politicians would act as responsible Bagehot overseers by pressuring bank agencies to improve their supervisory capacity and stepping up prudential regulation during...

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4 Argentina and Mexico: A Closer Look at Bank Bailouts

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pp. 62-95

Models are caricatures of reality that isolate a small number of factors presumed relevant in understanding complex phenomena. Contrary to the simplified portrait of crisis resolution developed in Chapter 3, the day-to-day management of banking crises involves a variety of decisions regarding which banks to close, how to promote recapitalization of the banking system, how to empower banking...

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5 Variation in Government Bailout Propensities

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pp. 96-115

Chapter 4 dissected the policy response to systemic banking crises during the mid-1990s of two governments, a democratic regime that carried out policies close to the Bagehot ideal-type and a semi-authoritarian regime that pursued policies closer to Bailout. The analysis in that chapter is consistent with the main proposition of this book, namely, that politicians in democracies react differently...

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6 Political Regimes and Bailout Propensities

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pp. 116-144

This chapter contributes several necessary extensions to the analysis presented in Chapter 5. The purpose of these extensions is twofold: First, I intend to throw further light on the process that leads governments to implement bank bailouts. Second, and more importantly, I plan to convince the reader that the restraining effect...

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7 Political Regimes and Banking Crises

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pp. 145-170

The theory developed in Chapter 3 suggests that the salutary effects of democracy do not stop at limiting financial loss-sharing with taxpayers after the beginning of a banking crisis. Instead, rational forward-looking entrepreneurs and bankers should be able to anticipate that democratic governments have limited freedom to engage in onerous bailouts in bad times. This realization should lead them...

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Conclusion

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pp. 171-177

The term “bailout” has an unmistakable pejorative connotation in banking policy. This connotation builds up with every instance of government support to failing banks, regardless of the extent of this support and its stated policy objectives. Bank bailouts violate innate norms of fairness because they suggest that governments...

Appendices

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pp. 178-186

References

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pp. 187-198

Index

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pp. 199-208