Discussion Paper

So Far, So Good: Government Insurance of Financial Sector Tail Risk


Abstract: The US government has intervened to provide extraordinary support 16 times from 1970 to 2020 with the goal of preventing or mitigating (or both) the cost of financial instability to the financial sector and the real economy. This article discusses the motivation for such support, reviewing the instances where support was provided, along with one case where it was expected but not provided. The article then discusses the moral hazard and fiscal risks posed by the government's insurance of the tail risk along with ways to reduce the government's risk exposure.

Keywords: financial stability; FDIC; Federal Reserve; Treasury; bailout; financial history;

JEL Classification: F33; F36; G18; G21; G23; G28; G32; H12; H6; N22;

https://doi.org/10.29338/ph2021-13

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Provider: Federal Reserve Bank of Atlanta

Part of Series: Policy Hub

Publication Date: 2021-11-08