Markets · 6 pages · 12 min

Why it is not the same as a bailout of shareholders

Last-resort lending bridges cash, while a shareholder bailout uses public money to preserve equity.

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From the opening

A bailout of shareholders uses public resources to keep equity value alive, by injecting capital, guaranteeing losses, or buying assets for more than the market will pay. Last-resort lending on classic terms leaves the owners holding the residual, because the cash is a loan that must be repaid against collateral. The opening covers a loan is supposed to be repaid, equity is the residual claim, and capital injections keep the owners.

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Inside

A loan is supposed to be repaid
Equity is the residual claim
Capital injections keep the owners
Unpaid loans turn into transfers
Where the idea stops applying
A distinction worth keeping

Sources

Bagehot lending versus capital injection
Bank resolution and equity wipeout

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Why it is not the same as a bailout of shareholders

From the opening

Inside

Sources

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