Blanket Guarantee and Restructuring Decisions for Multinational Banks in a Bargaining Model
Bank of Finland, Research Department
Government of the Republic of Finland - Government Institute for Economic Research (VATT)
August 3, 2009
Bank of Finland Research Discussion Paper No. 16/2009
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, G28working papers series
Date posted: August 17, 2009
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