Allocating losses: Bail-ins, bailouts and bank regulation

We study the interaction between government's bailout policy and a bank's willingness to impose losses on (or “bail in”) investors based its private information. In absence of regulation, bail-ins in early stages crisis are too small, while bailouts large frequent. Moreover, bank may face run by informed investors, creating further distortions leading larger bailout. show how regulator with limited information can raise welfare and, some cases, improve financial stability. The optimal involves partial delegation: sets bounds size bail-in, but allows choose within these bounds.