Bank Bail-Outs, International Linkages and Cooperation
Title: Bank Bail-Outs, International Linkages and Cooperation
Series/Number: EUI ECO; 2010/05
Financial institutions are increasingly linked internationally and engaged in cross-border operations. As a result, financial crises and potential bail-outs by governments have important international implications. Extending Allen and Gale (2000) we provide a model of international contagion allowing for bank bail-outs financed by distortionary taxes. In the sequential game between governments, there are inefficiencies due to spillovers, free-riding and limited burden-sharing. When countries are of equal size, an increase in cross-border deposit holdings improves, in general, the non-cooperative outcome. For efficient crisis managment, ex-ante fiscal burden sharing is essential as ex-post contracts between governments do not achieve the same global welfare.
Subject: bail-out; contagion; financial crisis; international institutional arrangements; F36; F42; G01; G28
Type of Access: openAccess