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Wishful thinking or effective threat? Tightening bank resolution regimes and bank risk-taking

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  • Ignatowski, Magdalena
  • Korte, Josef

Abstract

We propose a framework for testing the effects of changes in bank resolution regimes on bank behavior. By exploiting the differential relevance of recent changes in U.S. bank resolution (i.e., the introduction of the Orderly Liquidation Authority, OLA) for different types of banks, we are able to simulate a quasi-natural experiment using a difference-in-difference framework. We find that banks that are more affected by the introduction of the OLA (1) significantly decrease their overall risk-taking and (2) shift their loan origination toward lower risk, indicating the general effectiveness of the regime change. This effect, however, does (3) not hold for the largest and most systemically important banks. Hence, the introduction of the OLA in the U.S. alone does not appear to have solved the too-big-to-fail problem and might need to be complemented with other measures to limit financial institutions’ risk-taking.

Suggested Citation

  • Ignatowski, Magdalena & Korte, Josef, 2014. "Wishful thinking or effective threat? Tightening bank resolution regimes and bank risk-taking," Journal of Financial Stability, Elsevier, vol. 15(C), pages 264-281.
  • Handle: RePEc:eee:finsta:v:15:y:2014:i:c:p:264-281
    DOI: 10.1016/j.jfs.2014.05.002
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    2. Hüser, Anne-Caroline & Hałaj, Grzegorz & Kok, Christoffer & Perales, Cristian & van der Kraaij, Anton, 2018. "The systemic implications of bail-in: A multi-layered network approach," Journal of Financial Stability, Elsevier, vol. 38(C), pages 81-97.
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    8. Ignatowski, Magdalena & Korte, Josef, 2014. "Resolution threats and bank discipline: What Europe can learn for the Single Resolution Mechanism from US experience," SAFE Policy Letters 33, Goethe University Frankfurt, Research Center SAFE - Sustainable Architecture for Finance in Europe.
    9. Cutura, Jannic Alexander, 2018. "Debt holder monitoring and implicit guarantees: Did the BRRD improve market discipline?," SAFE Working Paper Series 232, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    10. Marinč, Matej & Rant, Vasja, 2014. "A cross-country analysis of bank bankruptcy regimes," Journal of Financial Stability, Elsevier, vol. 13(C), pages 134-150.
    11. Thomas Conlon & John Cotter, 2015. "Eurozone bank resolution and Bail-In - Intervention, triggers and writedowns," Working Papers 201501, Geary Institute, University College Dublin.
    12. Shekhar Aiyar & Charles W. Calomiris & Tomasz Wieladek, 2015. "How to Strengthen the Regulation of Bank Capital: Theory, Evidence, and A Proposal," Journal of Applied Corporate Finance, Morgan Stanley, vol. 27(1), pages 27-36, March.

    More about this item

    Keywords

    Bank resolution; Orderly Liquidation Authority; FDIC; Bank behavior; Risk-taking;

    JEL classification:

    • 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
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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