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Erlenmaier, Ulrich
Gersbach, Hans
Year of Publication: 
Series/Report no.: 
CESifo Working Paper 591
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.
financial intermediation
macroeconomic risk
banking regulation
discriminatory bailout
funds concentration
aggregate liquidity
consistent expectations
Document Type: 
Working Paper
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