Type: Working Paper
Bank Bail-Outs, International Linkages and Cooperation
Working Paper, EUI ECO, 2010/05
NIEPMANN, Friederike, SCHMIDT-EISENLOHR, Tim, Bank Bail-Outs, International Linkages and Cooperation, EUI ECO, 2010/05 - https://hdl.handle.net/1814/13342
Retrieved from Cadmus, EUI Research Repository
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.
Cadmus permanent link: https://hdl.handle.net/1814/13342
Series/Number: EUI ECO; 2010/05