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Conditional Individual Bailouts - a Potential Anti-crisis Instrument

Ihssane Loudiyi's picture

by Rebekka E. Grun

Why save the banks, and not their clients?

The current financial crisis is not the first for economists or central bankers. What was relatively new though is that many proven tools do not seem to work. Monetary impulses, liquidity – for a long time the market did not seem to take notice. Fiscal impulse, stimulus packages and bank bailouts – little success in most places. Increasing the dose – ditto. Maybe it is time to step back and acknowledge this crisis as different, to examine it for specific causes and tailor a new tool.

The root cause of the crisis is known; financially semi-literate clients were talked into mortgages they did not understand and resulted a bigger bite than they could chew. This happened to an extent that generated a crash wave big enough to shake more than one national banking sector.

Why now does the discussion on remedies not focus on this cause? Why not save the individuals that went bust rather than their banks? Unconditional bailouts, of course, would generate the wrong incentives (for the banks as well, by the way). It is therefore important to attach smart conditions to discourage free riding. For example a course in financial literacy and commitment to a program of (maybe painful) debt restructuring, and possibly further measures to improve the education or health of the affected individual or family.

Many countries have successfully experimented with the so-called Individual Development Accounts, financial literacy campaigns combined with highly subsidized savings accounts. The small scale of these programs has so far been explained by their high cost. Not unsimilar in their philosophy, conditional cash transfers, or CCTs, have proven their effectiveness and efficiency at a larger scale. In times where the bill for bailout may be high anyway, these recipes are worth applying. Conditional Individual Bailouts (CIBs) may be more effective and sustainable than insuring professional speculators.


Rebekka E. Grun is a Senior Economist in the Social Protection unit of the Middle East and North Africa (MENA) Region at the World Bank. The German version of this article was originally published by the online-version of Die Zeit.


Submitted by Hazel Edmunds on
As one who was "sold" credit that is now totally unaffordable I can appreciate your views on the banks getting help but not the clients of those banks. I mis-managed my budget last week and went 60p overdrawn for which the charge is £15 + £6 per day for every 24 hours that the overdrawn amount is not paid in to the bank. And this is to a bank that the UK government bailed out!!

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