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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 inter-country income inequality, in the non-cooperative 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 CESifo Group Munich in its series CESifo Working Paper Series with number 3384.

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Date of creation: 2011
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Handle: RePEc:ces:ceswps:_3384
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Keywords: bailout; contagion; financial crisis; international institutional arrangements;

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Find related papers by JEL classification:
  • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
  • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
  • G01 - Financial Economics - - General - - - Financial Crises
  • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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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. 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.
  3. Todd Keister, 2014. "Bailouts and Financial Fragility," Departmental Working Papers 201401, Rutgers University, Department of Economics.
  4. 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.

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