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Bank Bailouts, International Linkages and Cooperation

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  • Friederike Niepmann
  • Tim Schmidt-Eisenlohr

Abstract

Financial institutions are increasingly linked internationally. As a result, financial crisis and government intervention have stronger effects beyond borders. We provide a model of international contagion allowing for bank bailouts. While a social planner trades off tax distortions, liquidation losses and intra- and intercountry income inequality, in the noncooperative game between governments there are inefficiencies due to externalities, no burden sharing and free-riding. We show that, in absence of cooperation, stronger interbank linkages make government interests diverge, whereas cross-border asset holdings tend to align them. We analyze different forms of cooperation and their effects on global and national welfare.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp1023.

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Date of creation: Nov 2010
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Handle: RePEc:cep:cepdps:dp1023

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Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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Keywords: Portfolio choice; international transmission of shocks; monetary policy;

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Cited by:
  1. Fidrmuc, Jarko & Hake, Mariya & Stix, Helmut, 2013. "Households’ foreign currency borrowing in Central and Eastern Europe," Journal of Banking & Finance, Elsevier, vol. 37(6), pages 1880-1897.
  2. Todd Keister, 2010. "Bailouts and financial fragility," Staff Reports 473, Federal Reserve Bank of New York.
  3. Iman van Lelyveld & Marco Spaltro, 2011. "Coordinating Bank Failure Costs and Financial Stability," DNB Working Papers 306, Netherlands Central Bank, Research Department.
  4. Maier, Ulf & Haufler, Andreas, 2013. "Regulatory competition in credit markets with capital standards as signals," Munich Reprints in Economics 19240, University of Munich, Department of Economics.

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