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'Crony Capitalism', Bail Outs and Bank Runs

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  • Femminis, Gianluca
  • Ruggerone, Luigi

Abstract

We present a simple model where bank runs are possible and we analyse the role of subsidization of future investment in this setting. We find that such a policy exacerbates the short-run liquidity problem for banks. Moreover, we highlight that a ?shift in expectations? about the keeping of the subsidization promises induces a bank run. We analyse the effects of a (partial) forced conversion of non liquidated deposits into banks equities, showing how a bank recapitalisation of this type may help solving the problem. In fact, the deposit to equity swap can make credible an ex post recovery of the banking system, thus preventing the shift in expectation from generating a self-fulfilling bank crisis. This commitment device may prove useful also in the case of ?political uncertainty?.

Suggested Citation

  • Femminis, Gianluca & Ruggerone, Luigi, 2001. "'Crony Capitalism', Bail Outs and Bank Runs," CEPR Discussion Papers 2751, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:2751
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    References listed on IDEAS

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    More about this item

    Keywords

    Financial crisis; Bank runs; Bail out; International lending;
    All these keywords.

    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
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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