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Liquidation, bailout, and bail-in: Insolvency resolution mechanisms and bank lending

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  • Lambrecht, Bart
  • Tse, Alex

Abstract

We present a dynamic, continuous-time model in which risk averse inside equityholders set a bank's lending, payout, and financing policies, and the exposure of bank assets to crashes. We study how the prevailing insolvency resolution mechanism affects these policies, the insolvency rate, loss in default, value at risk (VaR), and the net value created by the bank. VaR depends non-trivially on jump (crash) risk, diffusion risk and the horizon. We examine the commonplace assertion that bailouts encourage excessive lending and risk-taking compared to the liquidation and bail-in regimes, and explore whether bailouts could be financed by banks without taxpayers' money.

Suggested Citation

  • Lambrecht, Bart & Tse, Alex, 2019. "Liquidation, bailout, and bail-in: Insolvency resolution mechanisms and bank lending," CEPR Discussion Papers 13734, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:13734
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    Cited by:

    1. Modena, Andrea, 2020. "Recapitalization, bailout, and long-run welfare in a dynamic model of banking," SAFE Working Paper Series 292, Leibniz Institute for Financial Research SAFE.
    2. Schürhoff, Norman & Dimopoulos, Theodosios Sakis, 2021. "Self-inflicted debt crises," CEPR Discussion Papers 15781, C.E.P.R. Discussion Papers.
    3. Beck, Thorsten & Radev, Dayen & Schnabel, Isabel, 2020. "Bank Resolution Regimes and Systemic Risk," CEPR Discussion Papers 14724, C.E.P.R. Discussion Papers.
    4. Andrea Modena, 2020. "Recapitalization, Bailout, and Long-run Welfare in a Dynamic Model of Banking," Working Papers 2020:23, Department of Economics, University of Venice "Ca' Foscari".
    5. Leanza, Luca & Sbuelz, Alessandro & Tarelli, Andrea, 2021. "Bail-in vs bail-out: Bank resolution and liability structure," International Review of Financial Analysis, Elsevier, vol. 73(C).

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    More about this item

    Keywords

    Liquidation; Bailout; Bail-in; Asset sale; Agency;
    All these keywords.

    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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