Talk and the City: How Far to Trust Bankers (Not) Calling for Bailouts

Diemo Dietrich and Thomas Gehrig

No 20532, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: To evaluate a bank's resilience to financial stress, authorities often rely on private information from a peer institution, or counterparty. This reliance can be perilous, especially when assessing bailout options. Within a global games approach to bank runs, we study communication about a systemically important bank's financial status between an informed counterparty of said bank and an uninformed authority. This communication is costless, non-binding, and unverifiable—and yet pivotal for the authority's decision to bailout the bank. When information about the counterparty's own liquidity needs is private, the counterparty may exaggerate the systemically important bank's true need for support, but it may also withhold adverse information entirely. We show that the authority’s risks in assessing bailout options is (1) shaped by the strategic behavior of the informed counterparty, (2) dependent on knowledge of the counterparty’s own financial position, and (3) not necessarily continuous.

JEL-codes: D83 G21 G28 H12 (search for similar items in EconPapers)
Date: 2025-08
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