Catch, Restrict, and Release : The Real Story of Bank Bailouts

Bank bailouts are not ''one-shot'' events as commonly portrayed, but dynamic processes in which series of steps occur over time lasting for months or years. Regulators first ''catch'' financially-distressed banks and provide financial assistance. At this time, regulators also ''restrict'' banks' activities for a time period of ex ante unknown length until eventual ''release'' when bank capital ratios are restored to sufficiently healthy levels. The ''catch-restrict-release'' approach is employed globally, including US TARP and EU bailouts, and applies to both common bailout types -- capital injections and debt guarantees. We offer design principles for socially-optimizing regulators to conduct bailouts in a model where banks dynamically manage capital in anticipation of these bailouts. We further conduct tests using hand-collected data for EU bank bailouts, which provide a superior laboratory for analysis. Findings suggest regulators act in manners qualitatively consistent with model predictions for social optimization