This paper uses game theory to analyze who should be in charge of euro-area bank
bailouts: National Central Banks or the ECB. The international transmission of shocks
pleads for a centralized authority that optimally internalizes. But when the public is
uncertain about the depth of a crisis, a central authority can worsen contagion. The
public does not know if a bailout in a given country is for bank-specific reasons only, or
due to containment of international transmission. Beliefs about the health of the rest
of the region’s banking system are negatively affected, leading to bank runs elsewhere.
Under asymmetric information about the extent of a crisis, a decentralized authority
that is transmission-indifferent can be optimal.