In this paper, we examine how the regulatory design of bailout institutions affects the outcome of bank bailout decisions. In the German savings bank sector, distress events can be resolved by local politicians or a state-level association. We show that decisions by local politicians with close links to the bank are distorted by personal considerations: while distress events per se are not related to the electoral cycle, the probability of local politicians injecting taxpayers' money into a bank in distress is 30% lower in the year directly preceding an election. Using the timing of the distress event in the electoral cycle as an instrument, we show that a decentralized local bailout results in worse future performance and less effcient credit allocation of the affected banks. We also observe a signifcantly worse real sector performance of localities under decentralized political bailouts as compared with those under centralized association bailouts. Our findings illustrate that larger distance between banks and decision makers reduces distortions in the decision making process, which has implications for the design of bank regulation and supervision.

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