Banking Industry and the Safety Net Subsidy

摘要

Governments use monetary policies to counteract the effects of financial crises.211u001eIn this paper we examine the subsidy that such safety net policies provide to the 211u001ebanking industry. Using a model of uncertainty-driven financial crises, we show 211u001ethat any monetary policy designed to maintain risky investment in the face of 211u001einvestor uncertainty (and thus promote economic growth and stability) will 211u001esubsidize the banking industry. In addition, we show that the mere presence of a 211u001emonetary authority willing to support a failing banking system in bad times 211u001esubsidizes the banking industry, even if those bad times do not occur. A 211u001econditional bailout policy that does not extend equally to all financial 211u001einstitutions creates a greater subsidy for those institutions perceived as being 211u001eclose to the central bank, possibly giving these institutions a competitive 211u001eadvantage. Economic profits, in this model, are required to cover fixed costs of 211u001eentry into the banking system.