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Bank Bail-Outs, International Linkages and Cooperation
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1725-6704
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EUI ECO; 2010/05
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NIEPMANN, Friederike, SCHMIDT-EISENLOHR, Tim, Bank Bail-Outs, International Linkages and Cooperation, EUI ECO, 2010/05 - https://hdl.handle.net/1814/13342
Abstract
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.