Las constelaciones de interés y los regímenes ambientales

As the importance of banking institutions as a tool for economic growth continues to increase, the need to ensure stability in financial institutions has become vital. The incidence of financial difficulties and banking crises have become more frequent in recent times, the need for urgent intervention to ensure financial stability has also become more intense. Policymakers have been presented with the dilemma of allowing financial institutions to either collapse or bail them out by providing liquidity for them to continue operations. Allowing an institution to fail results in loose of confidence in the financial systems, and this could lead to the failure of other financial institutions. While the bailout of an institution results in the use of taxpayers’ fund, which lots of studies argue could result in moral hazard(Gorton & Huang, 2004; Smith, 2011). Likewise, Poczter (2012) is of the view that the most controversial element of many governments’ responses to the recent financial crisis is the bailout of the banking sector. Advocates of the bailout arrangements believe they add liquidity during periods of financial difficulties and facilitate financial systems recovery. On the hand, policymakers and scholars who do not support the provision of bailouts and similar arrangements argue that they result in moral hazard because bank managements assume more risk due to the believe that government will bail out any eventual losses. Also, Smith (2011)

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in his study on the dilemma of bank bailouts indicated that bank bailouts are disliked because:

 They are an abuse of taxpayers’ funds, which could be used for infrastructural development, and

 Bailouts disregard the free-market theory that holds that they prevent market forces from naturally correcting market defects.

Hence, this dilemma presents the need to study the impact of financial safety nets (bailouts) on financial stability and bank performance.

Gorton & Huang (2004) argued that governments can effectively provide liquidity. They opined that governments are better placed to bailout banks; hence, they can inject liquidity more efficiently than private investors when banks are in distress. The rationale of governments world over to implement bailout policies, and similar arrangements rest on their intent to stabilise the banking sector and ensure banks carry out their intermediary roles. The questions that should be asked at this junction are “Will bank bailouts ensure long-term financial stability? And how will bank bailouts policies be designed to promote effective bank performance and financial stability? So, before seeking to answer this question in regards to the scope of this study, it is important we look at existing literature on the subject of bank bailouts.

Furthermore, Grossman & Woll (2012) indicated that bank bailouts are a function of economic pressures, so governments have no choice but to intervene during periods of financial difficulties. Progressively, they engaged in a comparative analysis of bailouts in different economies. They illustrated that the comparison of the Danish and Irish financial systems showed that they both experienced similar types of exposures to the recent financial crisis, but their bailout arrangements differed. The government handled the Irish bailouts of the banking sector, while the private sector in Denmark participated alongside the government, meaning only minimal amount of tax payer’s money was used. Denmark was not alone in this approach, as the study also indicated the private sector coordinated with the government in France to bail out the French banking sector. Additionally, the British government initially wanted to rely on private takeovers but had to inject funds and nationalise banks like the Royal Bank of Scotland (RBS) and Lloyds TSB in the wake of the financial crisis.

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Most research and attention in recent times that centre on bank bailouts stem from the fact that the cost of bailing out banking institutions are huge and the consequence of these costly interventions worldwide are unknown (Poczter, 2012). Poczter in her study on the long-term effects of bank bailouts in Indonesia opined that though the rationale for government intervention (bailouts) is to reduce systemic risk and restore lending, the injection of liquidity to save banks from collapse might create long-term incentives to engage in excessive risk- taking. She also suggested that recent critics of the U.S bailout programme implemented through the Troubled Assets Recovery Program (TARP) have indicated that bailed out banks are not increasing lending but rather channelling the capital received elsewhere. Similarly, Giannetti & Simonov (2013) argued that government intervention (liquidity support) for bad banks encourages bank management to engage in worse lending decisions.

Dell’Aricca & Ratnovski (2012) revisited the link between bailouts and bank risk taking. They opined that government intervention in the form of bailouts creates moral hazards and encourages risk-taking. Though acknowledging that bailouts have moral hazard effects that encourage risk-taking, Dell’Aricca & Ratnovski showed that when there are risks externalities across banks, bailouts also protect prudent banks against contagion. To that end, bailouts are not in themselves bad. Hence, they suggested that bailouts should encourage adequate supervision and monitoring to reduce bank risk taking.

Furthermore, Giannetti & Simonov (2013) are of the view that theoretical evidence on bank bailouts indicate that the real effects of bailouts depend on the size of the recapitalizations, the quality of the banks’ clients and the banks’ ability to meet capital requirements. In this line of thought, Bhattacharya & Nyborg (2011) argued that to be effective, the injection of liquidity must be large enough to solve the debt problems of banks. If the recapitalization is not enough, it would be ineffective in spurring bank lending and preventing a bank run or failure.

Recent empirical evidence on the long-run benefits of bank bailouts is limited. Related literature on bank bailouts try to present arguments for or against bank bailouts and how governments are to inject capital and who to receive them. For instance, Giannetti & Simonov (2013) argued that bailouts should be designed in ways that will not alter ex-ante lending incentives of banks. While Diamond (2001) suggested, governments should only extend bailouts to banks that have specialised knowledge about their borrowers. This assertion holds that banks that grant loans without due process should be exempted from

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bailouts. In another perspective, Diamond & Rajan (2005) opined that bank bailouts should not be given to failing banks because it could backfire by increasing the demand for liquidity and result in further insolvency. These arguments go to show that no study has provided an optimal solution to the dilemma of bank bailouts.

In like manner, De Caux, McGroarty, & Brede (2016) analysed the long-term costs and benefits of bailout strategies in banking systems. They found that bailouts serve as effective tools that limit the occurrence of bank failures in the short-run. However, inappropriate intervention strategies hearten risk-taking, which renders bailouts inefficient and disadvantageous to long-term system stability. Hence, bailouts should be accompanied with strategies that enhance risk management practices.

Bank bailouts have been granted to different banks and in various banking sectors. The evident benefit was that some of these banks were saved from collapse. Conversely, the real problem remains in some countries, as governments have not been able to find lasting solutions to the bailed out banks. Some of these banks have been nationalised and finding buyers have proved difficult. For instance, Royal Bank of Scotland (RBS) and Lloyds Bank have not been able to find worthy buyers. The fact that the banks remain in the control of the government (politicians) also presents a different dimension. Governments come and go, meaning different governments with different policies and financial institutions like banks require some form of stability to function at optimum.

The submissions above show that moral hazard has remained the cardinal problem of bailout strategies. The bailout strategy seems to be a temporary fix as it forestalls the collapse of banking institutions in the short term. However, it does not prevent nor guarantee that bank executives will not engage in risky ventures. The inability of bailout strategy to overcome the moral hazard problem suggests that regulatory authorities will continue to experiment until they come up with the most suitable strategy that does not require the use of taxpayer’s funds. To that end, Nigerian regulators employed the bridge banking mechanism after it experimented with the bailout strategy in 2009. The bridge banking mechanism is therefore presented below.

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