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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. Ester Faia, Goethe Universität Frankfurt and CEPR & Beatrice Weder di Mauro, Gutenberg Universität Mainz and CEPR, 2015. "Cross-Border Resolution of Global Banks," European Economy - Discussion Papers 2015 - 011, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
  2. Todd Keister, 2016. "Bailouts and Financial Fragility," Review of Economic Studies, Oxford University Press, vol. 83(2), pages 704-736.
  3. Niepmann, Friederike, 2013. "Banking across borders," Discussion Papers 19/2013, Deutsche Bundesbank, Research Centre.
  4. 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.
  5. Tirole, Jean, 2012. "Country Solidarity, Private Sector Involvement and the Contagion of Sovereign Crises," IDEI Working Papers 761, Institut d'Économie Industrielle (IDEI), Toulouse, revised Sep 2012.
  6. Iman van Lelyveld & Marco Spaltro, 2011. "Coordinating Bank Failure Costs and Financial Stability," DNB Working Papers 306, Netherlands Central Bank, Research Department.
  7. Faia, Ester & Weder, Beatrice, 2016. "Cross-Border Resolution of Global Banks: Bail in under Single Point of Entry versus Multiple Points of Entry," CEPR Discussion Papers 11171, C.E.P.R. Discussion Papers.
  8. Lucyna Anna Gornicka & Marius Andrei Zoican, 2016. "Too-International-to-Fail? Supranational Bank Resolution and Market Discipline," Post-Print hal-01253632, HAL.
  9. Andreas Haufler & Ulf Maier, 2016. "Regulatory Competition in Capital Standards with Selection Effects among Banks," CESifo Working Paper Series 5839, CESifo Group Munich.
  10. 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.
  11. Jean Tirole, 2015. "Country Solidarity in Sovereign Crises," American Economic Review, American Economic Association, vol. 105(8), pages 2333-63, August.
  12. Thorsten Beck & Wolf Wagner, 2016. "Supranational Supervision: How Much and for Whom?," International Journal of Central Banking, International Journal of Central Banking, vol. 12(2), pages 221-268, June.

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