Bank bailouts, international linkages, and cooperation

Friederike Niepmann, Tim Schmidt-Eisenlohr

Research output: Contribution to journalArticlepeer-review


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.

Original languageEnglish (US)
Pages (from-to)270-305
Number of pages36
JournalAmerican Economic Journal: Economic Policy
Issue number4
StatePublished - Nov 2013
Externally publishedYes

ASJC Scopus subject areas

  • General Economics, Econometrics and Finance


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