Opt-in strategy not working in Germany

I had posted how NZ seems to be using lessons from behavioral economics to protect its financial system. Basically NZ had used a opt-in strategy where banks had to choose to be part of the deposit guarantee program. The main reason could be that NZ wanted to provide the signal that its banking and financial system is safe (read nudges blog view as well).

Infact, most of the bailout packages have been structured in that fashion. The firms have to opt for the plan rather than the opt-out plan where all are included and a firm which does not want the plan, has to opt out of the plan .

However, Eurointelligence points (scroll below) that this opt-in strategy is not working in Germany.

There are increasing signs that the German bank rescue plan is not working. Lucas Zeisemakes the point that the money market is still frozen, and that the biggest mistake of the German plan had been the voluntary nature of bank rescues, which has led to the perverse situation that so far only one state-owned bank, BayernLB, has asked for new funds. Zeise says the German government made the mistake to ask the banks to co-draft the rescue plan, rather than forcing banks into recapitalisation, as the British and French have done.

So, what Germans instead needed is an opt-out plan.

Who says behavioral economics does not matter? This selection of what should be the default seems to be quite critical for the bail-out plans. As a policymaker, you need to take a call whether your financial system/banks are safe or not? If things are bad, there is no point having an opt-in strategy (like Germany) and one should simply include all the banks and let the safer ones opt-out of the plan. In case things are fine, opt-in makes sense as it sends the signal that all is well.

Some research to understand the various signals and default strategies is welcome.

One Response to “Opt-in strategy not working in Germany”

  1. Are opt-in bank recapitalization plans working? « Says:

    […] opt-in bank recapitalization plans working? Mostly Economics points to this passage from Euro Intelligence that says no. The money market is still […]

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