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Failed bank takeovers and financial stability

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  • Gómez, Fabiana

Abstract

Current discussion about the design of bank resolution frameworks suggests that the takeover of a failed bank by an incumbent one has two effects on financial stability. First, the incumbent takeover may boost financial stability by providing bankers with incentives to be solvent so as to profit from their competitors’ failure. Second, the incumbent takeover may spoil financial stability by creating “Systemically Important Financial Institutions”. The innovation of this paper is to capture these two effects in a theoretical model. We show that when incumbent bankers are impatient enough (i.e., they have high discount rates), the second effect prevails over the first one. We discuss the implications of this result for the design of bank resolution policies.

Suggested Citation

  • Gómez, Fabiana, 2015. "Failed bank takeovers and financial stability," Journal of Financial Stability, Elsevier, vol. 16(C), pages 45-58.
    • Handle: RePEc:eee:finsta:v:16:y:2015:i:c:p:45-58
    DOI: 10.1016/j.jfs.2014.11.003
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    More about this item

    Keywords

    Bank takeovers; Financial stability; Systemically important financial institutions;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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