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This paper will examine the liquidity crises of the banking sector and will argue that governments may have a propensity to rescue ailing banks beyond socially optimal levels in order to safeguard their reputation. This distortion fuels political uncertainty, since citizens may disapprove of bailouts, thereby electorally punishing the government. This paper will show that greater political uncertainty worsens financial and political instability because this uncertainty increases the set of model parameters for which bank runs and government collapse are optimal. This increased uncertainty may lead to a political and financial crisis in a country experiencing similar conditions. Contagion may spread if citizens’ belief in certain types of governments (benevolent or selfish) spill over into other countries.