The optimal bailout policy in an interbank network

Khai Zhi Sim

Economics Letters, 2022, vol. 216, issue C

Abstract: This paper introduces a theoretical model to analyze the optimal bailout policy in an interconnected banking system. The model intends to highlight two motivations behind providing a partial bailout to banks in distress: prevention of costly bankruptcies and prevention of financial contagion. In the extreme cases where the cost of bailout is sufficiently high or low, the zero-bailout policy or the full-bailout policy is optimal respectively. Otherwise, a partial bailout policy is optimal. The fiscal authority has to balance the benefits of bailouts from bankruptcy and contagion prevention against the cost when it decides on the amount of partial bailout to provide to banks.

Keywords: Bank run; Bailout; Interbank network; Contagion; Fiscal policy (search for similar items in EconPapers)
JEL-codes: E61 G21 G28 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0165176522001987
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:216:y:2022:i:c:s0165176522001987

DOI: 10.1016/j.econlet.2022.110628

Access Statistics for this article

Economics Letters is currently edited by Economics Letters Editorial Office

More articles in Economics Letters from Elsevier
Bibliographic data for series maintained by Catherine Liu ().