De Facto Bank Bailouts
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.
Co-Author(s): Diego Puente