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Contribution Details
| Type | Working Paper |
| Scope | Contributions to practice |
| Title | "Never again!" - the dynamics of bank bailouts |
| Organization Unit | |
| Authors |
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| Language |
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| Institution | University of Zurich |
| Series Name | - |
| Number | - |
| Date | 2014 |
| Abstract Text | Abstract We model bank bailout decisions by a state that looks beyond a bailout, taking into account future cost of rescuing or liquidating the bank. Using a repeated game we find that a long-term perspective makes both, the state and banks, more cautious. Yet, a looming “fiscal cliff” putting an end to bailouts, may make the state more aggressive. The expectation that a bank will never again need to be rescued in the future makes it an attractive bailout candidate in the present. Running out of money therefore is not an ideal commitment strategy. Political resolutions like “never again” are not only unrealistic but misdirected. Bailouts of systemically relevant banks are efficient not only ex post; they may also reduce moral hazard ex ante. Policy measure should focus on banks’ systemic importance, not on bailouts. |
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