Stability-Equivalence of Bailouts and Bailins with Welfare consequences

Linda Schilling

No 18832, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: In a global game, I show that creditor bailins, when well-designed, can attain the exact same level of bank stability as costly creditor bailouts. This result holds for both risk-averse and risk-neutral creditors. Because bailouts are costly but do not necessarily provide a stability advantage, a ``stability-equivalent'' bailin can yield higher welfare than a bailout either if the bank is small in the economy or if the bank is large and the ex ante stability level of the bank is high. This holds even though impatient creditor types exist that have to consume early and suffer from a bailin.

JEL-codes: D81 D82 E61 G21 G28 G33 G38 (search for similar items in EconPapers)
Date: 2024-02
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