Allocating Losses: Bail-ins, Bailouts and Bank Regulation

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 and banks’ willingness to impose losses on (or “bail in”) their investors. The government has limited commitment and may choose to bail out banks facing large losses. The anticipation of this bailout undermines a bank’s private incentive to impose a bail-in. In the resulting equilibrium, bail-ins are too small and bailouts are too large. Some banks may also face a run by informed investors, creating further distortions and leading to larger bailouts. We show how a regulator with limited information can raise welfare and improve financial stability by imposing a system-wide, mandatory bail-in at the onset of a crisis. In some situations, allowing banks to choose between meeting a minimum bail-in and opting out can raise welfare further.

Keywords: Bank bailouts; moral hazard; financial stability; banking regulation (search for similar items in EconPapers)
JEL-codes: E61 G18 G28 (search for similar items in EconPapers)
Pages: 68
Date: 2020-09
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 (4)

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Related works:
Journal Article: Allocating losses: Bail-ins, bailouts and bank regulation (2023)
Working Paper: Allocating Losses: Bail-ins, Bailouts and Bank Regulation (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:bon:boncrc:crctr224_2020_091

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