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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. Iman van Lelyveld & Marco Spaltro, 2011. "Coordinating Bank Failure Costs and Financial Stability," DNB Working Papers 306, Netherlands Central Bank, Research Department.
  3. 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.
  4. Todd Keister, 2010. "Bailouts and financial fragility," Staff Reports 473, Federal Reserve Bank of New York.

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