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How Much Do Guarantees and Bailouts Cost the Government?

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Abstract

Governments in advanced economies absorb a large and growing share of aggregate credit risk. That exposure arises from explicit and implicit contingent liabilities such as the ones that culminated in bailouts during the Global Financial Crisis (GFC) and from loan guarantees extended during the Covid-19 pandemic. Despite the growth of credit policy as a crisis response tool and substitute for traditional fiscal assistance, governments continue to underreport the associated costs and risks. More comprehensive and timely cost estimates, produced using a fair value framework, would increase transparency and discourage overreliance on these policies. Such cost estimates for the GFC bailouts and Covid-19 pandemic guarantee programs reveal costs that were an order of magnitude lower than the risk exposures those policies entailed but nevertheless were large enough to call into question whether less expensive and less risky policy alternatives could have achieved the same goals.

Suggested Citation

  • Deborah Lucas, 2024. "How Much Do Guarantees and Bailouts Cost the Government?," Policy Hub, Federal Reserve Bank of Atlanta, vol. 2024(3), pages 1-29, May.
  • Handle: RePEc:fip:a00068:99096
    DOI: 10.29338/ph2024-03
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    References listed on IDEAS

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    Cited by:

    1. Shy, Oz & Stenbacka, Rune, 2024. "Lobbying and liquidity requirements: Large versus small banks," Journal of Financial Stability, Elsevier, vol. 74(C).

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    More about this item

    Keywords

    international lender of last resort; Federal Reserve; financial crises; eurodollar;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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