The Funds Concentration Effect and Discriminatory Bailout

Erlenmaier, Ulrich; Gersbach, Hans

doi:10.2139/ssrn.288945

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The Funds Concentration Effect and Discriminatory Bailout

51 Pages Posted: 20 Nov 2001

See all articles by Ulrich Erlenmaier

Ulrich Erlenmaier

University of Heidelberg - Alfred Weber Institute for Economics

Hans Gersbach

ETH Zurich - CER-ETH -Center of Economic Research; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Date Written: October 2001

Abstract

In the presence of macroeconomic shocks severe enough to threaten the liquidity or solvency of the banking system, the regulator can rely on the funds concentration effect to save long-term investment projects. Some banks are forced into bankruptcy with the result that other banks obtain more new funds and remain solvent. We investigate two different implementations of the funds concentration effect and the corresponding discriminatory bailout scheme: "random bailout" and "bailout the big ones". While the latter can be problematic in terms of stability, it is superior to the former in terms of welfare and credibility.

Keywords: Financial Intermediation, Macroeconomic Risk, Banking Regulation, Discriminatory Bailout, Funds Concentration, Aggregate Liquidity, Consistent Expectations

JEL Classification: D84, E44, G28

Suggested Citation: Suggested Citation

Erlenmaier, Ulrich and Gersbach, Hans, The Funds Concentration Effect and Discriminatory Bailout (October 2001). Available at SSRN: https://ssrn.com/abstract=288945 or http://dx.doi.org/10.2139/ssrn.288945