Blanket Guarantee and Restructuring Decisions for Multinational Banks in a Bargaining Model

Abstract:     
This paper examines blanket guarantee and restructuring decisions in respect of a multinational bank (MNB) using Nash bargaining, when the threat of a panic motivates countries to take decisions quickly. The failure of the bank would cause unevenly distributed externalities between the countries concerned, which influences restructuring incentives. In equilibrium, the bank is either liquidated or one - or both of the countries - recapitalizes it. The partition of the recapitalisation costs is sensitive to the country-specific benefits and costs from recapitalisation, panics and liquidation. The home regulator benefits from the privilege of being the only entity that can legally liquidate the MNB. Rational expectations regarding the bargaining result affect the incentives to declare a blanket guarantee.

Number of Pages in PDF File: 40

Keywords: banking crises, bank restructuring, blanket guarantee, bargaining, deposit insurance

JEL Classification: G21, G22, G28

working papers series