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De Facto Bank Bailouts

Published online by Cambridge University Press:  04 March 2022

Phong T. H. Ngo Open the ORCID record for Phong T. H. Ngo [Opens in a new window]  and
Diego L. Puente-Moncayo
Phong T. H. Ngo*
Affiliation:
The Australian National University Research School of Finance, Actuarial Studies, and Statistics
Diego L. Puente-Moncayo
Affiliation:
The Australian National University Research School of Finance, Actuarial Studies, and Statistics [email protected]
*
[email protected] (corresponding author)
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Abstract

The U.S. government uses its voting power to direct IMF loans to countries where U.S. banks are exposed to sovereign default (a de facto bailout). This effect is stronger in years when the costs of direct bailouts are higher and is also found among major European IMF members. We find that de facto bailouts reduce government incentives to default and that U.S. Congressional voting on IMF funding is consistent with a private interest view of government. Overall, we identify an alternative mechanism through which governments can backstop the losses of large multinational banks.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 57 , Issue 8 , December 2022 , pp. 3081 - 3113
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

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Footnotes

We thank an anonymous referee and Mara Faccio (the editor) for helpful comments, which significantly improved the article. We also thank Murray Frank, Ron Masulis, Renee McKibbin, Mathew Ringenberg, and Harry Scheule, and seminar participants at the Australian National University, the Centre for Applied Macroeconomic Analysis (CAMA), and the University of Technology Sydney for helpful comments and discussions.

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