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The Funds Concentration Effect and Discriminatory Bailout

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  • Ulrich Erlenmaier
  • Hans Gersbach

Abstract

In the presence of macroeconomic shocks severe enough to threaten the liquidity or solvency of the banking system, the regulator can rely on the funds concentration effect to save long-term investment projects. Some banks are forced into bankruptcy with the result that other banks obtain more new funds and remain solvent. We investigate two different implementations of the funds concentration effect and the corresponding discriminatory bailout scheme: “random bailout“ and “bailout the big ones“. While the latter can be problematic in terms of stability, it is superior to the former in terms of welfare and credibility.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 591.

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Date of creation: 2001
Date of revision:
Handle: RePEc:ces:ceswps:_591

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Related research

Keywords: financial intermediation; macroeconomic risk; banking regulation; discriminatory bailout; funds concentration; aggregate liquidity; consistent expectations;

References

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  1. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
  2. Hans Gersbach, 2002. "Financial Intermediation and the Creation of Macroeconomic Risks," CESifo Working Paper Series 695, CESifo Group Munich.
  3. Charles A. E. Goodhart & Haizhou Huang, 1999. "A model of the lender of last resort," Proceedings, Federal Reserve Bank of San Francisco.
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  6. Cordella, Tito & Yeyati, Eduardo Levy, 2003. "Bank bailouts: moral hazard vs. value effect," Journal of Financial Intermediation, Elsevier, vol. 12(4), pages 300-330, October.
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  8. Fries,S. & Mella-Barral,P. & Perraudin,W.R.M., 1995. "Optimal Bank Reorganisation and the Fair Pricing of Deposit Garantees," Cambridge Working Papers in Economics 9417, Faculty of Economics, University of Cambridge.
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  10. Steven Radelet & Jeffrey Sachs, 1998. "The Onset of the East Asian Financial Crisis," NBER Working Papers 6680, National Bureau of Economic Research, Inc.
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  12. Bhattacharya, S. & Boot, A.W.A. & Thakor, A.V., 1995. "The Economics of Bank Regulation," Papers 9516, Centro de Estudios Monetarios Y Financieros-.
  13. Bhattacharya Sudipto & Thakor Anjan V., 1993. "Contemporary Banking Theory," Journal of Financial Intermediation, Elsevier, vol. 3(1), pages 2-50, October.
  14. George J. Mailath & Loretta J. Mester, 1993. "A positive analysis of bank closure," Working Papers 93-10/R, Federal Reserve Bank of Philadelphia.
  15. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  16. Boot, Arnoud W A & Thakor, Anjan V, 1993. "Self-Interested Bank Regulation," American Economic Review, American Economic Association, vol. 83(2), pages 206-12, May.
  17. Xavier Freixas, 1999. "Optimal Bail Out Policy, Conditionality and Creative Ambiguity," FMG Discussion Papers dp327, Financial Markets Group.
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Cited by:
  1. Hakenes, Hendrik & Schnabel, Isabel, 2004. "Banks without Parachutes - Competitive Effects of Government Bail-out Policies," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 8, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.

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