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Bailouts, Bail-ins and Banking Crises

Author

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  • Todd Keister

    ()

  • Yuliyan Mitkov

    ()

Abstract

We study the interaction between a government's bailout policy during a bank- ing crisis and individual banks' willingness to impose losses on (or "bail in") their investors. Banks in our model hold risky assets and are able to write complete, state-contingent contracts with investors. In the constrained efficient allocation, banks experiencing a loss immediately bail in their investors and this bail-in removes any incentive for investors to run on the bank. In a competitive equi- librium, however, banks may not enact a bail-in if they anticipate being bailed out. In some cases, the decision not to bail in investors provokes a bank run, creating further distortions and leading to even larger bailouts. We ask what macroprudential policies are useful when bailouts crowd out bail-ins.

Suggested Citation

  • Todd Keister & Yuliyan Mitkov, 2019. "Bailouts, Bail-ins and Banking Crises," CRC TR 224 Discussion Paper Series crctr224_2019_091, University of Bonn and University of Mannheim, Germany.
  • Handle: RePEc:bon:boncrc:crctr224_2019_091
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    File URL: https://www.crctr224.de/en/research-output/discussion-papers/discussion-papers#DP91
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    Cited by:

    1. Linda Schilling, 2018. "Optimal Forbearance of Bank Resolution," Working Papers 2018-15, Becker Friedman Institute for Research In Economics.
    2. Lambrecht, Bart & Tse, Alex, 2019. "Liquidation, bailout, and bail-in: Insolvency resolution mechanisms and bank lending," CEPR Discussion Papers 13734, C.E.P.R. Discussion Papers.
    3. Martynova, Natalya & Perotti, Enrico & Suarez, Javier, 2019. "Bank capital forbearance," ESRB Working Paper Series 93, European Systemic Risk Board.
    4. Katz, Matthijs & van der Kwaak, Christiaan, 2018. "The Macroeconomic Effectiveness of Bank Bail-ins," Research Report 2018009-EEF, University of Groningen, Research Institute SOM (Systems, Organisations and Management).

    More about this item

    Keywords

    Financial Fragility; Bailouts; Bail-ins; Limited Commitment;

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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