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Optimal Forbearance of Bank Resolution

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  • Schilling, Linda

Abstract

This paper analyzes a regulator's optimal strategic delay of resolving banks when the regulator's announcement of the intervention delay endogenously affects the depositors' run-propensity. Given intervention, the regulator either liquidates the remaining illiquid assets, or continues managing the assets (suspension intervention) at a reduced skill level. In either case, I show, the depositors may react to more conservative policy by preempting the regulator: The depositors run on the bank more often ex ante if the regulator tolerates fewer withdrawals until intervention. A policy of never intervening can leave the bank more stable than a conservative policy that tolerates few withdrawals.

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  • Schilling, Linda, 2017. "Optimal Forbearance of Bank Resolution," MPRA Paper 112409, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:112409
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    Cited by:

    1. Jesus Fernandez-Villaverde & Daniel Sanches & Linda Schilling & Harald Uhlig, 2021. "Central Bank Digital Currency: Central Banking For All?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 41, pages 225-242, July.
    2. Schilling, Linda, 2017. "Optimal Forbearance of Bank Resolution," MPRA Paper 112409, University Library of Munich, Germany.
    3. Voellmy, Lukas, 2019. "Shadow banking and financial stability under limited deposit insurance," ESRB Working Paper Series 105, European Systemic Risk Board.
    4. Schilling, Linda, 2023. "Smooth versus Harsh Regulatory Interventions and Policy Equivalence," CEPR Discussion Papers 17996, C.E.P.R. Discussion Papers.
    5. König, Philipp Johann & Mayer, Paul & Pothier, David, 2022. "Optimal timing of policy interventions in troubled banks," Discussion Papers 10/2022, Deutsche Bundesbank.

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    More about this item

    Keywords

    Bank resolution; intervention delay; global games; suspension of convertibility; bank run;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • G2 - Financial Economics - - Financial Institutions and Services
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G3 - Financial Economics - - Corporate Finance and Governance
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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