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'Crony Capitalism', Bail Outs and Bank Runs

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  • Femminis, Gianluca
  • Ruggerone, Luigi

Abstract

We present a simple model where bank runs are possible and we analyse the role of subsidization of future investment in this setting. We find that such a policy exacerbates the short-run liquidity problem for banks. Moreover, we highlight that a ‘shift in expectations’ about the keeping of the subsidization promises induces a bank run. We analyse the effects of a (partial) forced conversion of non liquidated deposits into banks equities, showing how a bank recapitalisation of this type may help solving the problem. In fact, the deposit to equity swap can make credible an ex post recovery of the banking system, thus preventing the shift in expectation from generating a self-fulfilling bank crisis. This commitment device may prove useful also in the case of ‘political uncertainty’.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2751.

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Date of creation: Mar 2001
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Handle: RePEc:cpr:ceprdp:2751

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Related research

Keywords: Bail Out; Bank Runs; Financial Crisis; International Lending;

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  1. Burnside, Craig & Eichenbaum, Martin & Rebelo, Sergio, 1999. "Prospective deficits and the asian currency crisis," Policy Research Working Paper Series 2174, The World Bank.
  2. Roberto Chang & Andres Velasco, 1997. "Financial fragility and the exchange rate regime," Working Paper 97-16, Federal Reserve Bank of Atlanta.
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  8. Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini, 1998. "What Caused the Asian Currency and Financial Crisis?," Temi di discussione (Economic working papers) 343, Bank of Italy, Economic Research and International Relations Area.
  9. Amar Bhattacharya & Marcus Miller, 1999. "Coping with Crises: Is There a "Silver Bullet"?," CSGR Hot Topics: Research on Current Issues 06, Centre for the Study of Globalisation and Regionalisation (CSGR), University of Warwick.
  10. Roberto Chang & Andres Velasco, 1998. "Financial Crises in Emerging Markets," NBER Working Papers 6606, National Bureau of Economic Research, Inc.
  11. David Marshall, 1998. "Understanding the Asian crisis: systemic risk as coordination failure," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q III, pages 13-38.
  12. Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc.
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