Template-Type: ReDIF-Paper 1.0
Title: Bailouts, Bail-ins and Banking Crises
Author-Name: Todd Keister
Author-Email: todd.keister@rutgers.edu
Author-Name: Yuliyan Mitkov
Author-Email: ymitkov@uni-bonn.de
Classification-JEL: E61, G21, G28
Keywords: Financial Fragility, Bailouts, Bail-ins, Limited Commitment

Abstract: We study the interaction between a government's bailout policy during a bank-
ing crisis and individual banks' willingness to impose losses on (or "bail in") their
investors. Banks in our model hold risky assets and are able to write complete,
state-contingent contracts with investors. In the constrained efficient allocation,
banks experiencing a loss immediately bail in their investors and this bail-in
removes any incentive for investors to run on the bank. In a competitive equi-
librium, however, banks may not enact a bail-in if they anticipate being bailed
out. In some cases, the decision not to bail in investors provokes a bank run,
creating further distortions and leading to even larger bailouts. We ask what
macroprudential policies are useful when bailouts crowd out bail-ins.

Note: 
Length: 51
Creation-Date: 2019-05
Revision-Date: 
File-URL: https://www.crctr224.de/research/discussion-papers/archive/dp091
File-Format: application/pdf
Handle: RePEc:bon:boncrc:CRCTR224_2019_091