Dallas Fed, Report: The Connection between Banking and Sovereign Debt Crises

“The model suggests that governments must carefully weigh the longer-term consequences of intervening in the banking sector during crises.”

“Bailouts may provide immediate relief, but they come with a trade-off: Although they can boost bank liquidity and output during banking crises, paying for bailouts may also require additional borrowing, thus leading to heightened government default risk and increased long-term borrowing costs.”

“Ultimately, banning bailouts may lead to better long-term outcomes by breaking the loop between banking and sovereign crises and creating better borrowing opportunities for governments.”

“If governments commit to no future bailouts, private lenders would be willing to lend to governments at a lower rate, knowing that the governments would be less likely to fall into sovereign default crises. As a result, the governments would be able to borrow less expensively with less chance of default. Such gains may well outweigh the benefits of bank bailouts.”