Template-Type: ReDIF-Paper 1.0
Title: Too-Many-To-Fail and the Design of Bailout Regimes 
Author-Name: Wolf Wagner 
Author-Email: wagner@rsm.nl
Author-Name: Jing Zeng
Author-Email: jzeng@uni-bonn.de

Classification-JEL: G1, G2
Keywords: systemic risk, optimal investment, too-many-to-fail, time-consistency, bailouts

Abstract: We show that the too-many-to-fail problem can be resolved through an appropriate design of the bailout regime. In our model, optimal investment
balances benefits from more banks investing in high-return projects against higher systemic costs due to more banks failing simultaneously. Under a
standard bailout regime, banks herd, anticipating that simultaneous failures trigger bailouts. However, a policy that prioritizes bailing out a
predesignated group of banks eliminates herding and achieves the first-best. If such a policy is not feasible, its benefits can be attained by
decentralizing bailout decisions to two regulators each responsible for a separate group of banks.


Note: 
Length: 53
Creation-Date: 2024-11
Revision-Date:
File-URL: https://www.crctr224.de/research/discussion-papers/archive/dp613
File-Format: application/pdf
Handle: RePEc:bon:boncrc:CRCTR224_2024_613