Bailouts, Bail-ins and Banking Crises

Todd Keister and Yuliyan Mitkov ()

CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany

Abstract: We study the interaction between a government's bailout policy during a bank- ing crisis and individual banks' willingness to impose losses on (or "bail in") their investors. Banks in our model hold risky assets and are able to write complete, state-contingent contracts with investors. In the constrained efficient allocation, banks experiencing a loss immediately bail in their investors and this bail-in removes any incentive for investors to run on the bank. In a competitive equi- librium, however, banks may not enact a bail-in if they anticipate being bailed out. In some cases, the decision not to bail in investors provokes a bank run, creating further distortions and leading to even larger bailouts. We ask what macroprudential policies are useful when bailouts crowd out bail-ins.

Keywords: Financial Fragility; Bailouts; Bail-ins; Limited Commitment (search for similar items in EconPapers)
JEL-codes: E61 G21 G28 (search for similar items in EconPapers)
Pages: 51
Date: 2019-05
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-rmg
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Citations: View citations in EconPapers (3)

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Working Paper: Bailouts, Bail-ins and Banking Crises (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:bon:boncrc:crctr224_2019_091

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