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Optimal Forbearance of Bank Resolution

Author

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  • LINDA M. SCHILLING

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 (“prompt corrective action”) or continues managing the assets at a reduced skill level (“resolution under receivership”). In either case, I show that if the regulator tolerates fewer withdrawals until intervention, the depositors may react by preempting the regulator: they run on the bank more often ex ante. A policy of never intervening can leave the bank more stable than a conservative intervention policy.

Suggested Citation

  • Linda M. Schilling, 2023. "Optimal Forbearance of Bank Resolution," Journal of Finance, American Finance Association, vol. 78(6), pages 3621-3675, December.
    • Handle: RePEc:bla:jfinan:v:78:y:2023:i:6:p:3621-3675
    DOI: 10.1111/jofi.13273
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    Cited by:

    1. Schilling, Linda, 2024. "Smooth Regulatory Intervention," MPRA Paper 120041, University Library of Munich, Germany.
    2. 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.
    3. Quintero-V, Juan C., 2025. "Measuring the impact of changing deposit insurance coverage levels: Findings from Colombia," Journal of Banking & Finance, Elsevier, vol. 175(C).
    4. Machado, Caio & Pereira, Ana Elisa, 2026. "Guarantees, risk shifting and credit crunches," Journal of Banking & Finance, Elsevier, vol. 184(C).
    5. Voellmy, Lukas, 2019. "Shadow banking and financial stability under limited deposit insurance," ESRB Working Paper Series 105, European Systemic Risk Board.
    6. Rafael Matta & Enrico Perotti, 2024. "Pay, Stay, or Delay? How to Settle a Run," The Review of Financial Studies, Society for Financial Studies, vol. 37(4), pages 1368-1407.
    7. Linda M. Schilling, 2023. "Optimal Forbearance of Bank Resolution," Journal of Finance, American Finance Association, vol. 78(6), pages 3621-3675, December.
    8. Elizabeth C. Klee & Arazi Lubis & Chase Ross & Sharon Y. Ross & Alexandros Vardoulakis, 2026. "The Fragility of Perfectly Safe Digital Money," Finance and Economics Discussion Series 2026-037, Board of Governors of the Federal Reserve System (U.S.).
    9. Schilling, Linda, 2023. "Smooth versus Harsh Regulatory Interventions and Policy Equivalence," CEPR Discussion Papers 17996, Centre for Economic Policy Research.
    10. König, Philipp Johann & Mayer, Paul & Pothier, David, 2022. "Optimal timing of policy interventions in troubled banks," Discussion Papers 10/2022, Deutsche Bundesbank.
    11. Ahnert, Toni & Bertsch, Christoph & Leonello, Agnese & Marquez, Robert, 2024. "Bank fragility and risk management," Working Paper Series 441, Sveriges Riksbank (Central Bank of Sweden), revised 01 Dec 2025.
    12. König, Philipp J. & Mayer, Paul & Pothier, David, 2024. "Optimal timing of policy interventions in troubled banks," Journal of Financial Intermediation, Elsevier, vol. 60(C).
    13. Izumi, Ryuichiro & Li, Yang, 2025. "Rapid bank runs and delayed policy responses," Journal of Financial Stability, Elsevier, vol. 79(C).
    14. Schilling, Linda, 2026. "Pitfalls and Optimal Design of Emergency Liquidity Assistance," MPRA Paper 128236, University Library of Munich, Germany.
    15. Deidda, Luca G. & Panetti, Ettore, 2025. "Bank recovery and resolution planning, liquidity management and fragility," Journal of Financial Stability, Elsevier, vol. 78(C).

    More about this item

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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