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Stability-Equivalence of Bailouts and Bailins with Welfare consequences

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  • Schilling, Linda

Abstract

In a global game, I show that creditor bailins, when well-designed, can attain the exact same level of bank stability as costly creditor bailouts. This result holds for both risk-averse and risk-neutral creditors. Because bailouts are costly but do not necessarily provide a stability advantage, a ``stability-equivalent'' bailin can yield higher welfare than a bailout either if the bank is small in the economy or if the bank is large and the ex ante stability level of the bank is high. This holds even though impatient creditor types exist that have to consume early and suffer from a bailin.

Suggested Citation

  • Schilling, Linda, 2024. "Stability-Equivalence of Bailouts and Bailins with Welfare consequences," CEPR Discussion Papers 18832, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:18832
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    More about this item

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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