Reint Gropp and Jan Pieter Krahnen in a eurointelligence article look at the bank bailout problem.
During the recent financial crisis almost all bank rescue operations followed the same myopic script: once a troubled bank reports its troubles, a rush for resurrection sets in, frequently on a Friday evening after close of business. The authorities have only two and a half days, from Friday to Sunday, to find a workable solution. On Monday morning, before the opening of the markets on the other side of the globe, a water-tight rescue plan has to be presented to the public. More often than not, the bank will be bailed out with public money. This rewards excessive risk taking and weakens the position of the bank’s competitors. Both effects decrease social welfare and financial stability over the medium term. At the same time, the seeds for the next crisis are planted.
Their solution is what they call as reverse bailout: