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Bank Bailouts, International Linkages and Cooperation

Author

Listed:
  • Friederike Niepmann

    (European University Institute)

  • Tim Schmidt-Eisenlohr

    (University of Oxford)

Abstract

On the occasion of the 65th birthday of Governor Klaus Liebscher and in recognition of his commitment to Austria’s participation in European monetary union and to the cause of European integration, the Oesterreichische Nationalbank (OeNB) established a “Klaus Liebscher Award”. It has been offered annually since 2005 for up to two excellent scientific papers on European monetary union and European integration issues. The authors must be less than 35 years old and be citizens from EU member or EU candidate countries. Each “Klaus Liebscher Award” is worth EUR 10,000. The winning papers of the seventh Award 2011 were written by Friederike Niepmann and Tim Schmidt-Eisenlohr (shared award) and by Steffen Osterloh. Friederike Niepmann’s and Tim Schmidt-Eisenlohr’s paper is presented in this Working Paper while Steffen Osterloh’s contribution is contained in Working Paper 169 . In this paper Friederike Niepmann and Tim Schmidt-Eisenlohr start from the observation that financial institutions are increasingly linked internationally. As a result, financial crisis and government intervention have stronger effects beyond borders. The authors provide a model of international contagion allowing for bank bailouts. While a social planner trades off tax distortions, liquidation losses and intraand intercountry income inequality, in the non-cooperative game between governments there are inefficiencies due to externalities, no burden sharing and freeriding. The authors show that, in absence of cooperation, stronger interbank linkages make government interests diverge, whereas cross-border asset holdings tend to align them. The authors analyze different forms of cooperation and their effects on global and national welfare.

Suggested Citation

  • Friederike Niepmann & Tim Schmidt-Eisenlohr, 2011. "Bank Bailouts, International Linkages and Cooperation," Working Papers 170, Oesterreichische Nationalbank (Austrian Central Bank).
  • Handle: RePEc:onb:oenbwp:170
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    More about this item

    Keywords

    bailout; contagion; financial crisis; international institutional arrangements;
    All these keywords.

    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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