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Bailouts and Bank Runs in a Model of Crony Capitalism

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Author Info

  • Femminis Gianluca

    ()
    (Università Cattolica di Milano and CEPR)

  • Ruggerone Luigi

    ()
    (Corresponding Author, Banca Intesa, Risk Management, Piazza Ferrari 10, 20121 Milano, Italy - pho. (39) 02-87937025, fax (39) 02-87937646,)

Abstract

We present a simple multiple equilibria model that incorporates the functioning of crony capitalism. We find that a government which is keen to support the interests of the élite is ready to stand the risk of a bank run since this is part of an equilibrium where investments are heavily subsidized, which favors the élite. However, we find that the liaison between the government and the business community is not per se sufficient to induce vulnerability of financial institutions to panic: the willingness to favor the élite also provides an incentive to rescue the banking system in the event of a run. This stabilizing effect dominates when the élite is relatively large. We also study how a policy of banks recapitalization may contribute to the stability of the banking institution. In fact, such a policy can make credible an ex post recovery of the financial system, thus preventing the panic from generating a self-fulfilling bank crisis.

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File URL: http://www.degruyter.com/view/j/bejm.2004.4.1/bejm.2004.4.1.1153/bejm.2004.4.1.1153.xml?format=INT
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Bibliographic Info

Article provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.

Volume (Year): 4 (2004)
Issue (Month): 1 (October)
Pages: 1-36

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Handle: RePEc:bpj:bejmac:v:contributions.4:y:2004:i:1:n:11

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Web page: http://www.degruyter.com

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Cited by:
  1. Vaugirard, Victor, 2007. "Bank bailouts and political instability," European Journal of Political Economy, Elsevier, vol. 23(4), pages 821-837, December.

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