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'Crony Capitalism', Bail Outs and Bank Runs

  • Femminis, Gianluca
  • Ruggerone, Luigi

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’.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2751.

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Date of creation: Mar 2001
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Handle: RePEc:cpr:ceprdp:2751
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  1. Harold L. Cole & Timothy J. Kehoe, 1998. "Self-Fulfilling Debt Crises," Levine's Working Paper Archive 114, David K. Levine.
  2. Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini, 1998. "Paper Tigers? A Model of the Asian Crisis," NBER Working Papers 6783, National Bureau of Economic Research, Inc.
  3. Roberto Chang & Andres Velasco, 1997. "Financial fragility and the exchange rate regime," FRB Atlanta Working Paper No. 97-16, Federal Reserve Bank of Atlanta.
  4. Roberto Chang & Andres Velasco, 1998. "Financial Crises in Emerging Markets," NBER Working Papers 6606, National Bureau of Economic Research, Inc.
  5. Alberto Alesina & Alessandro Prati & Guido Tabellini, 1989. "Public Confidence and Debt Management: A Model and A Case Study of Italy," NBER Working Papers 3135, National Bureau of Economic Research, Inc.
  6. Corsetti, Giancarlo & Pesenti, Paolo & Roubini, Nouriel, 1999. "What caused the Asian currency and financial crisis?," Japan and the World Economy, Elsevier, vol. 11(3), pages 305-373, October.
  7. Miller, Merton, 1998. "Asian financial crisis," Japan and the World Economy, Elsevier, vol. 10(3), pages 355-358, July.
  8. Burnside, Craig & Eichenbaum, Martin & Rebelo, Sérgio, 1998. "Prospective Deficits and the Asian Currency Crises," CEPR Discussion Papers 2015, C.E.P.R. Discussion Papers.
  9. David Marshall, 1998. "Understanding the Asian crisis: systemic risk as coordination failure," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q III, pages 13-38.
  10. Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc.
  11. Roberto Chang & Andres Velasco, 1998. "Financial crises in emerging markets: a canonical model," FRB Atlanta Working Paper No. 98-10, Federal Reserve Bank of Atlanta.
  12. Amar Bhattacharya & Marcus Miller, 1999. "Coping with Crises: Is There a "Silver Bullet"?," CSGR Hot Topics: Research on Current Issues 06, Centre for the Study of Globalisation and Regionalisation (CSGR), University of Warwick.
  13. Irwin, Gregor & Vines, David, 1999. "A Krugman-Dooley-Sachs Third Generation Model of the Asian Financial Crisis," CEPR Discussion Papers 2149, C.E.P.R. Discussion Papers.
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