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Bailout Bifurcation

Author

Listed:
  • Wagner, Wolf
  • Zeng, Jing

Abstract

We show that bifurcating bailouts eliminates systemic herding. In our model, the first best requires investment in separate projects to reduce systemic costs from correlated failures. Bailouts that treat all failing banks equally cause banks to herd on a project, anticipating that joint failures trigger support. Bailouts that prioritize predesignated banks eliminate herding by making bailout expectations heterogeneous. A financial architecture with two “home-biased†regulators achieves similar benefits. Our analysis offers a novel rationale for differentiated access to the public safety net, such as for traditional versus shadow banks, or among groups of traditional banks.

Suggested Citation

  • Wagner, Wolf & Zeng, Jing, 2025. "Bailout Bifurcation," CEPR Discussion Papers 19976, Centre for Economic Policy Research.
    • Handle: RePEc:cpr:ceprdp:19976
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    File URL: https://cepr.org/publications/DP19976
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    Cited by:

    1. is not listed on IDEAS
    2. Siema Hashemi, 2024. "Banking on Resolution: Portfolio Effects of Bail-in vs. Bailout," Working Papers wp2024_2410, CEMFI.

    More about this item

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services

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