IDEAS home Printed from https://ideas.repec.org/a/eee/finsta/v16y2015icp45-58.html

Failed bank takeovers and financial stability

Author

Listed:
  • Gómez, Fabiana

Abstract

Current discussion about the design of bank resolution frameworks suggests that the takeover of a failed bank by an incumbent one has two effects on financial stability. First, the incumbent takeover may boost financial stability by providing bankers with incentives to be solvent so as to profit from their competitors’ failure. Second, the incumbent takeover may spoil financial stability by creating “Systemically Important Financial Institutions”. The innovation of this paper is to capture these two effects in a theoretical model. We show that when incumbent bankers are impatient enough (i.e., they have high discount rates), the second effect prevails over the first one. We discuss the implications of this result for the design of bank resolution policies.

Suggested Citation

  • Gómez, Fabiana, 2015. "Failed bank takeovers and financial stability," Journal of Financial Stability, Elsevier, vol. 16(C), pages 45-58.
    • Handle: RePEc:eee:finsta:v:16:y:2015:i:c:p:45-58
    DOI: 10.1016/j.jfs.2014.11.003
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1572308914001144
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jfs.2014.11.003?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Xavier Vives, 2011. "Competition policy in banking," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 27(3), pages 479-497.
    2. Tabak, Benjamin M. & Fazio, Dimas M. & Cajueiro, Daniel O., 2013. "Systemically important banks and financial stability: The case of Latin America," Journal of Banking & Finance, Elsevier, vol. 37(10), pages 3855-3866.
    3. Barth,James R. & Caprio,Gerard & Levine,Ross, 2008. "Rethinking Bank Regulation," Cambridge Books, Cambridge University Press, number 9780521709309, January.
    4. Ongena, Steven & Penas, María Fabiana, 2009. "Bondholders' wealth effects in domestic and cross-border bank mergers," Journal of Financial Stability, Elsevier, vol. 5(3), pages 256-271, September.
    5. John H. Boyd & Gianni De Nicoló, 2005. "The Theory of Bank Risk Taking and Competition Revisited," Journal of Finance, American Finance Association, vol. 60(3), pages 1329-1343, June.
    6. Elijah Brewer & Julapa Jagtiani, 2013. "How Much Did Banks Pay to Become Too-Big-To-Fail and to Become Systemically Important?," Journal of Financial Services Research, Springer;Western Finance Association, vol. 43(1), pages 1-35, February.
    7. Ning Gong & Kenneth D. Jones, 2013. "Bailouts, Monitoring, and Penalties: An Integrated Framework of Government Policies to Manage the Too-Big-to-Fail Problem," International Review of Finance, International Review of Finance Ltd., vol. 13(3), pages 299-325, September.
    8. Acharya, Viral V. & Yorulmazer, Tanju, 2007. "Too many to fail--An analysis of time-inconsistency in bank closure policies," Journal of Financial Intermediation, Elsevier, vol. 16(1), pages 1-31, January.
    9. DeYoung, Robert & Kowalik, Michal & Reidhill, Jack, 2013. "A theory of failed bank resolution: Technological change and political economics," Journal of Financial Stability, Elsevier, vol. 9(4), pages 612-627.
    10. Jones, Kenneth D. & Oshinsky, Robert C., 2009. "The effect of industry consolidation and deposit insurance reform on the resiliency of the U.S. bank insurance fund," Journal of Financial Stability, Elsevier, vol. 5(1), pages 57-88, January.
    11. De Nicolo, Gianni & Kwast, Myron L., 2002. "Systemic risk and financial consolidation: Are they related?," Journal of Banking & Finance, Elsevier, vol. 26(5), pages 861-880, May.
    12. Perotti, Enrico C. & Suarez, Javier, 2002. "Last bank standing: What do I gain if you fail?," European Economic Review, Elsevier, vol. 46(9), pages 1599-1622, October.
    13. Glenn Hoggarth & Jack Reidhill & Peter Sinclair, 2004. "On the resolution of banking crises: theory and evidence," Bank of England working papers 229, Bank of England.
    14. Xavier Freixas & Jean‐Charles Rochet, 2013. "Taming Systemically Important Financial Institutions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(s1), pages 37-58, August.
    15. Klaus Schaeck & Martin Cihak & Simon Wolfe, 2009. "Are Competitive Banking Systems More Stable?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(4), pages 711-734, June.
    16. Mr. Gianni De Nicolo & Mr. Myron L. Kwast, 2002. "Systemic Risk and Financial Consolidation: Are they Related?," IMF Working Papers 2002/055, International Monetary Fund.
    17. Viral V. Acharya & Tanju Yorulmazer, 2008. "Cash-in-the-Market Pricing and Optimal Resolution of Bank Failures," The Review of Financial Studies, Society for Financial Studies, vol. 21(6), pages 2705-2742, November.
    18. Robert DeYoung & Douglas Evanoff & Philip Molyneux, 2009. "Mergers and Acquisitions of Financial Institutions: A Review of the Post-2000 Literature," Journal of Financial Services Research, Springer;Western Finance Association, vol. 36(2), pages 87-110, December.
    19. Craig O. Brown & I. Serdar Dinç, 2011. "Too Many to Fail? Evidence of Regulatory Forbearance When the Banking Sector Is Weak," The Review of Financial Studies, Society for Financial Studies, vol. 24(4), pages 1378-1405.
    20. Mailath George J. & Mester Loretta J., 1994. "A Positive Analysis of Bank Closure," Journal of Financial Intermediation, Elsevier, vol. 3(3), pages 272-299, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Beck, Thorsten & De Jonghe, Olivier & Schepens, Glenn, 2013. "Bank competition and stability: Cross-country heterogeneity," Journal of Financial Intermediation, Elsevier, vol. 22(2), pages 218-244.
    2. Korte, Josef, 2013. "Catharsis - The real effects of bank insolvency and resolution," Discussion Papers 21/2013, Deutsche Bundesbank.
    3. Michael Diemer & Uwe Vollmer, 2015. "What makes banking crisis resolution difficult? Lessons from Japan and the Nordic Countries," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 5(2), pages 251-277, December.
    4. Xavier Vives, 2011. "Competition and Stability in Banking," Central Banking, Analysis, and Economic Policies Book Series, in: Luis Felipe Céspedes & Roberto Chang & Diego Saravia (ed.),Monetary Policy under Financial Turbulence, edition 1, volume 16, chapter 12, pages 455-502, Central Bank of Chile.
    5. 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.
    6. Beck, T.H.L. & De Jonghe, O.G. & Schepens, G., 2012. "Bank Competition and Stability : Cross-country Heterogeneity (Revised version of CentER DP 2011-080)," Other publications TiSEM f600cdef-3c8b-4b85-9fed-6, Tilburg University, School of Economics and Management.
    7. Kostic, Natalija & Muthsam, Viktoria & Laux, Christian, 2023. "Accounting Changes and Enforcement of Bank Capital Requirements in a Crisis," VfS Annual Conference 2023 (Regensburg): Growth and the "sociale Frage" 277694, Verein für Socialpolitik / German Economic Association.
    8. David VanHoose, 2011. "Systemic Risk and Macroprudential Bank Regulation: A Critical Appraisal," Journal of Financial Transformation, Capco Institute, vol. 33, pages 45-60.
    9. Beck, T.H.L. & De Jonghe, O.G. & Schepens, G., 2012. "Bank Competition and Stability : Cross-country Heterogeneity (Revised version of EBC DP 2011-019)," Other publications TiSEM 7d000b07-3972-4634-bde2-2, Tilburg University, School of Economics and Management.
    10. Srivastav, Abhishek & Armitage, Seth & Hagendorff, Jens & King, Tim, 2018. "Better safe than sorry? CEO inside debt and risk-taking in bank acquisitions," Journal of Financial Stability, Elsevier, vol. 36(C), pages 208-224.
    11. Paul Fisher & Paul Grout, 2017. "Competition and prudential regulation," Bank of England working papers 675, Bank of England.
    12. repec:bof:bofrdp:urn:nbn:fi:bof-201603021033 is not listed on IDEAS
    13. Fiordelisi, Franco & Mare, Davide Salvatore, 2014. "Competition and financial stability in European cooperative banks," Journal of International Money and Finance, Elsevier, vol. 45(C), pages 1-16.
    14. Viral V Acharya & Lea Borchert & Maximilian Jager & Sascha Steffen, 2021. "Kicking the Can Down the Road: Government Interventions in the European Banking Sector," The Review of Financial Studies, Society for Financial Studies, vol. 34(9), pages 4090-4131.
    15. Rusmanto, Toto & Soedarmono, Wahyoe & Tarazi, Amine, 2020. "Credit information sharing in the nexus between charter value and systemic risk in Asian banking," Research in International Business and Finance, Elsevier, vol. 53(C).
    16. Yang, Hsin-Feng & Liu, Chih-Liang & Yeutien Chou, Ray, 2020. "Bank diversification and systemic risk," The Quarterly Review of Economics and Finance, Elsevier, vol. 77(C), pages 311-326.
    17. Viral V. Acharya & Lea Borchert & Maximilian Jager & Sascha Steffen, 2020. "Kicking the Can Down the Road: Government Interventions in the European Banking Sector," NBER Working Papers 27537, National Bureau of Economic Research, Inc.
    18. Duchin, R. & Sosyura, D., 2012. "Safer Rations, Riskier Portfolios : Banks’ responses to Government Aid," Other publications TiSEM e67533e7-f388-4860-b65e-0, Tilburg University, School of Economics and Management.
    19. Korte, Josef, 2015. "Catharsis—The real effects of bank insolvency and resolution," Journal of Financial Stability, Elsevier, vol. 16(C), pages 213-231.
    20. DeYoung, Robert & Kowalik, Michal & Reidhill, Jack, 2013. "A theory of failed bank resolution: Technological change and political economics," Journal of Financial Stability, Elsevier, vol. 9(4), pages 612-627.
    21. Benjamin M. Tabak & Dimas M. Fazio & Daniel O. Cajueiro, 2011. "Profit, Cost and Scale Efficiency for Latin American Banks: Concentration-Performance Relationship," Working Papers Series 244, Central Bank of Brazil, Research Department.

    More about this item

    Keywords

    ;
    ;
    ;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:finsta:v:16:y:2015:i:c:p:45-58. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jfstabil .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.