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A Coasean Approach to Bank Resolution Policy in the Eurozone

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  • Gregory Connor
  • Brian O’Kelly

Abstract

The Eurozone needs a bank resolution regime that can work across seventeen independent nations of diverse sizes with varying levels of financial development, limited fiscal coresponsibility, and with systemic instability induced by quick and low-cost deposit transfers across borders. We advocate a Coasean approach to bank resolution policy in the Eurozone, which emphasises clear and consistent contracts and makes explicit the public ownership of the externality costs of bank distress. A variety of resolution mechanisms are compared including bank debt holder bail-in, prompt corrective action, and contingent convertible bonds. We argue that the “dilute-in” of bank debt holders via contingent convertibility provides a clearer and simpler Coasean bargain for the Eurozone than the more conventional alternatives of debt holder bail-in or prompt corrective action.

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Bibliographic Info

Paper provided by Financial Markets Group in its series FMG Special Papers with number sp214.

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Date of creation: Dec 2012
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Handle: RePEc:fmg:fmgsps:sp214

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Web page: http://www.lse.ac.uk/fmg/

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  1. Acharya, Viral V & Drechsler, Itamar & Schnabl, Philipp, 2011. "A Pyrrhic Victory? Bank Bailouts and Sovereign Credit Risk," CEPR Discussion Papers 8679, C.E.P.R. Discussion Papers.
  2. Varian, H,R., 1991. "A Solution to the Problem of Externalities when Agents are Well-Informed," Papers 10, Michigan - Center for Research on Economic & Social Theory.
  3. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
  4. Varian, Hal R., 1995. "Coase, competition, and compensation," Japan and the World Economy, Elsevier, vol. 7(1), pages 13-27, May.
  5. George M. von Furstenberg, 2011. "Concocting Marketable Cocos," Working Papers 222011, Hong Kong Institute for Monetary Research.
  6. Kenneth Spong, 2000. "Banking regulation : its purposes, implementation, and effects," Monograph, Federal Reserve Bank of Kansas City, number 2000bria, December.
  7. Christian Wolff & Theo Vermaelen & George Pennacchi, 2010. "Contingent Capital: The Case for COERCs," LSF Research Working Paper Series 10-08, Luxembourg School of Finance, University of Luxembourg.
  8. Stephan Dieckmann & Thomas Plank, 2012. "Default Risk of Advanced Economies: An Empirical Analysis of Credit Default Swaps during the Financial Crisis," Review of Finance, European Finance Association, vol. 16(4), pages 903-934.
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Cited by:
  1. ap Gwilym, Rhys & Kanas, Angelos & Molyneux, Philip, 2013. "U.S. prompt corrective action and bank risk," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 26(C), pages 239-257.

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