Bail-Out
A bail-out occurs when a government provides financial support to prevent a failing bank from collapsing.
Meaning in Practice
In a bail-out, public funds are injected into a distressed bank to restore solvency or liquidity. This may take the form of capital injections, guarantees, or asset purchases. Bail-outs are typically used during systemic crises.
Why It Matters
Bail-outs can stabilize the financial system but may create moral hazard. They shift losses from private investors to taxpayers. Policymakers aim to minimize their use through stronger resolution frameworks.
Market Impact
Announcements of bail-outs often stabilize bank stocks and credit markets in the short term. However, they may raise concerns about public debt sustainability. Long-term market discipline can weaken if bail-outs are expected.
Example
During a systemic crisis, a government may recapitalize a major bank to prevent contagion and protect the broader economy.