Inter-bank and bank-state coordination are major predictors of the success of a bailout, a Harvard researcher studying bailout strategies in Europe and the U.S. claimed at a Center for European Studies seminar on Wednesday.
"We've had a wonderful social science moment in which the same thing happens across several countries at once," CES visiting scholar Cornelia Woll said about the global economic crisis that has unfolded since 2008.
Woll, who works at the Max Planck Institute for the Study of Societies in Cologne and the Paris Institute of Political Studies, said her research indicates that greater coordination between banks correlates with better outcomes from bailouts in the U.S. and Europe.
This effect, she said, is likely because coordination allows banks to share risk and lets banks “speak as one” in dialogues with government representatives.
"The ways in which the banking sector can speak to the government can crucially shape how a bailout is eventually defined," Woll said. "A close, one-to-one relationship between individual banks and the government leads to unbalanced bailouts."
Woll emphasized that, unlike historical data sets that remain static, her data can change from day to day. For example, she noted that she once studied "a German bailout that, from one day to the next, changed by 50 billion euros because of an accounting error."
She also discussed the spontaneous nature of the recent bailouts. The Irish bank bailout, Woll said, ultimately cost Ireland more than 225 percent of the nation’s GDP and was formulated overnight by a small group of government officials.
"It was a complete suicide mission," Woll said. Daniel K. Mügge, a CES visiting scholar who attended the talk, said that the speech reinforced "the enormous difficulty and uncertainty that the actors face when coming up with these [bailouts]."
Mügge asked, "If we as academics have trouble making sense with years of hindsight, how do you make decisions in the moment?"
Brigid Laffan, a CES visiting scholar from Ireland who also attended the seminar, said she felt that studying the bailouts was important but expressed skepticism that there could be conclusive explanations.
"Sure, [the theory] has some explanatory weight," Laffan said, "but the structure of banking systems varies a lot."
—Staff writer Benjamin M. Scuderi can be reached at firstname.lastname@example.org.