Richmond Fed researchers estimate that 61 percent of the liabilities of the financial system are subject to explicit or implicit protection from loss by the federal government. This protection may encourage risk-taking, making financial crises and bailouts more likely.
Last updated February 3, 2016
The Bailout Barometer is an estimate by Richmond Fed researchers Liz Marshall, Sabrina Pellerin, and John Walter of the share of private financial system liabilities for which the federal government provides protection from losses. In addition to protection provided by explicit government guarantee programs, the estimate includes implicit protection that people are likely to infer from past government actions and statements. Despite efforts to end ad hoc bailouts, the financial safety net that protects certain firms remains large under current government policies.
The latest estimate shows that the financial safety net covers 61 percent of the financial sector. This estimate also includes a breakdown by sector. These measures, compiled in January 2016, use data as of December 31, 2014. The Bailout Barometer has grown considerably since it was first estimated in 1999.
When creditors expect to be protected from losses, they will overfund risky activities, making financial crises and bailouts like those that occurred in 2007-08 more likely. An extensive safety net also creates a need for robust supervision of firms benefitting from perceived protection. Over time, shrinking the financial safety net is essential to restore market discipline and achieve financial stability. Doing so requires credible limits on ad hoc bailouts. Read more about the Richmond Fed's perspective on this issue.
Marshall, Liz, Sabrina Pellerin, and John Walter. "Bailout Barometer: How Large is the Financial Safety Net." Federal Reserve Bank of Richmond, last updated February 3, 2016, https://www.richmondfed.org/publications/research/special_reports/safety_net/.