The Political Economy of Bank Bailouts

The authors examine how the institutional design affects the outcome of bank bailout decisions. In the German savings bank sector, distress events can be resolved by local politicians or a state-level association. We show that decisions by local politicians with close links to the bank are distorted by personal considerations. The findings illustrate that larger distance between banks and decision makers reduces distortions in the decision making process, which has implications for the design of bank regulation and supervision.