Financial regulation policy may be distorted by governments' preferences for weakly-capitalised banks, a working paper published by the National Bank of Austria argues.

In Why are banks not recapitalized during crises? Matteo Crosignani proposes a model where governments may prefer to have undercapitalised domestic banking sectors during crises.

Under-capitalised banks, Crosignani says, may act as buyers of last resort for domestic public debt, at the cost of crowding out private lending. If