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The evolution of bank bailout policy: two centuries of variation, selection and retention

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Abstract

Why has the policy of state-backed bank bailouts emerged as the de facto global response by governments to crises involving systemic bank risk? This question has salience in the context that while bank bailouts solve an immediate problem of systemic risk, they create another set of problems almost as significant. Bailouts involve largescale socialization of private losses, are politically toxic, ideologically contrary to market norms, and economically costly to the state. For these reasons many commentators view the policy to be neither optimal nor desirable, yet it has nonetheless been institutionalized in all modern financial systems. In this paper I argue that the global diffusion of bank bailout policy over the past two centuries is an example of institutional evolution. A process of variation, selection and retention has winnowed down initial variation in responses to possible financial sector collapse to one policy, a state-backed guarantee to bail out the financial system. Understanding the past is a prerequisite for gaining insight into possible futures. Consequently, historical study of bank bailouts will contribute to understanding the future evolution of systemic banking crises by providing insight into the evolution of institutional resilience.

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Notes

  1. Thorstein Veblen’s work at the turn of the twentieth century foreshadowed modern VSR theory.

  2. By ‘natural’ I only wish to emphasize that these are factors that are not the result of human agency.

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Acknowledgments

The author thanks two anonymous reviewers as well as Campbell Jones and Steve Matthewman for their helpful comments on earlier versions of this paper. The author also wishes to thank the School of Sociology, University of Auckland for supporting primary research for this article. All errors are attributable to the author alone.

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  1. Institute for International Trade, University of Adelaide, 10 Pulteney Street, 5000, Adelaide, SA, Australia

    Naoise McDonagh

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McDonagh, N. The evolution of bank bailout policy: two centuries of variation, selection and retention. J Evol Econ 31, 1065–1088 (2021). https://doi.org/10.1007/s00191-020-00666-8

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