Work

Rules versus Discretion in Bank Resolution

Year: 2020

Type: article

Abstract: Recent reforms have given regulators broad powers to “bail-in” bank creditors during financial crises. We analyze efficient bail-ins and their implementation. To preserve liquidity, regulators must avoid signaling negative private information to creditors. Therefore, optimal bail-ins in bad times only depend on public information. As a result, the optimal policy cannot be implemented if regulators have wide discretion, due to an informational time-inconsistency problem. Rules mandating tough bail-ins after bad public signals, or contingent convertible (co-co) bonds, improve welfare. We further show that bail-in and bailout policies are complementary: if bailouts are possible, then discretionary bail-ins are more effective.

Source: Review of Financial Studies

DOI: 10.1093/rfs/hhaa032

Authors: Ansgar Walther, Lucy White

Institutions: Centre for Economic Policy Research, Imperial College London, University of Chicago

Language: English

Topic: Banking stability, regulation, efficiency

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDG: Peace, justice, and strong institutions

Open Access status: green

OpenAlex ID: W2984100290

FWCI: 7.793

Cites: 57

Cited by: 63

Related to: 10