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Bank Bail-Outs, International Linkages and Cooperation

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  • Friederike Niepmann
  • Tim Schmidt-Eisenlohr

Abstract

Financial institutions are increasingly linked internationally and engaged in cross-border operations. As a result, financial crises and potential bail-outs by governments have important international implications. Extending Allen and Gale (2000) we provide a model of international contagion allowing for bank bail-outs financed by distortionary taxes. In the sequential game between governments, there are inefficiencies due to spillovers, free-riding and limited burden-sharing. When countries are of equal size, an increase in cross-border deposit holdings improves, in general, the non-cooperative outcome. For efficient crisis managment, ex-ante fiscal burden sharing is essential as ex-post contracts between governments do not achieve the same global welfare.

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Bibliographic Info

Paper provided by European University Institute in its series Economics Working Papers with number ECO2010/05.

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Date of creation: 2010
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Handle: RePEc:eui:euiwps:eco2010/05

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Keywords: bail-out; contagion; financial crisis; international institutional arrangements;

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Cited by:
  1. Iman van Lelyveld & Marco Spaltro, 2011. "Coordinating Bank Failure Costs and Financial Stability," DNB Working Papers 306, Netherlands Central Bank, Research Department.
  2. Maier, Ulf & Haufler, Andreas, 2013. "Regulatory competition in credit markets with capital standards as signals," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79769, Verein für Socialpolitik / German Economic Association.
  3. Jarko Fidrmuc & Mariya Hake & Helmut Stix, 2011. "Households’ Foreign Currency Borrowing in Central and Eastern Europe," Working Papers 171, Oesterreichische Nationalbank (Austrian Central Bank).
  4. Todd Keister, 2010. "Bailouts and financial fragility," Staff Reports 473, Federal Reserve Bank of New York.

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