On the distributional effects of bank bailouts

Abstract

This paper studies distributional consequences of equity injections that are funded with financial-sector levies. In the model economy, financial intermediation supports both productive investment and individual consumption smoothing, subject to an equity requirement. When intermediary equity is low, then an equity injection involves a trade-off between increasing credit supply immediately and distortive levies that reduce credit supply in the future. I find that equity injections redistribute from poor to wealthy households, even though average welfare increases. While wealthy savers benefit greatly from an increased return on savings, poor households suffer from lower future wages.