Bank bailouts, international linkages, and cooperation

Niepmann, Friederike and Schmidt-Eisenlohr, Tim (2013) Bank bailouts, international linkages, and cooperation. American Economic Journal: Economic Policy, 5 (4). pp. 270-305.


Financial institutions are increasingly linked internationally. As a result, financial crises and government intervention have stronger effects beyond borders. We provide a model of international contagion allowing for bank bailouts. While a social planner trades off tax distortions, liquidation losses, and intra- and intercountry income inequality, in the noncooperative game between governments there are inefficiencies due to externalities, a lack of burden sharing, and free riding. We show that, in absence of cooperation, stronger interbank linkages make government interests diverge, whereas cross-border asset holdings tend to align them. We analyze different forms of cooperation and their effects on global and national welfare.

Item Type: Article
Subject(s): Taxation
Centre: Oxford University Centre for Business Taxation
Date Deposited: 18 Dec 2013 16:01
Last Modified: 14 Jul 2017 10:50
Funders: Not applicable

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