Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/225289 
Authors: 
Year of Publication: 
2020
Series/Report no.: 
SAFE Working Paper No. 292
Publisher: 
Leibniz Institute for Financial Research SAFE, Frankfurt a. M.
Abstract: 
This paper studies the link between bank recapitalization and welfare in a dynamic production economy. The model features financial frictions because banks benefit of a cost advantage at monitoring firms and face costly equity issuance. The competitive equilibrium outcome is inecient because agents do not internalize the e↵ects banks' capitalization over the allocation of capital, its price and, in turn, firms investments. It follows, individual recapitalizations are sub-optimal and bailout policies may benefit social welfare in the long-run. Bailouts improve capital allocation in states where aggregate banks are poorly capitalized, therefore enhancing their market valuation, fostering investments, and stabilizing the economy recovery path.
Subjects: 
banks
bailout
general equilibrium
financial frictions
recapitalization
welfare
JEL: 
D51
G21
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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