Catch, Restrict, and Release: The Real Story of Bank Bailouts

Abstract

Bank bailouts are not “one-shot” events commonly described in the literature. These bailouts are instead dynamic processes in which regulators “catch” financially distressed banks; “restrict” their activities over time; and “release” the banks from restrictions at sufficiently healthy capital ratios. The “catch-restrict-release” approach is a global phenomenon, which we document using hand-collected data on capital injection and debt guarantee bailouts in the European Union (EU) over 2008-2014. We offer principles for socially-optimizing regulators to conduct “catch-restrict-release” capital injection and debt guarantee bailouts, formalize these principles in a theoretical model, and empirically find that EU bailouts are qualitatively consistent with social optimization.