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Incentives and the Resolution of Bank Distress

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  • Glaessner, Thomas
  • Mas, Ignacio

Abstract

Unlike prudential regulations that are put in place prospectively to develop banks, procedures for dealing with banks in distress are generally determined on ad hoc basis. Often the lack of clarity in the policy framework creates incentives for bank managers, shareholders, depositors, and regulators that undercut prompt resolution of financial distress. The result is often inaction, the accumulation of bad debts, and ultimately the assumption of losses by the state. This article argues that government intervention to relieve financial distress should be institutionalized in a set of regulations that forces the authorities to comply with reporting and decision-making processes. Only in this way can inherent disincentives for dealing with distress be curtailed. Copyright 1995 by Oxford University Press.

Suggested Citation

  • Glaessner, Thomas & Mas, Ignacio, 1995. "Incentives and the Resolution of Bank Distress," World Bank Research Observer, World Bank Group, vol. 10(1), pages 53-73, February.
  • Handle: RePEc:oup:wbrobs:v:10:y:1995:i:1:p:53-73
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    Cited by:

    1. repec:onb:oenbwp:y::i:48:b:1 is not listed on IDEAS
    2. D.T. Llewellyn, 2000. "Some Lessons for Bank Regulation from Recent Crises," DNB Staff Reports (discontinued) 51, Netherlands Central Bank.
    3. Martin BROWNBRIDGE, 1998. "The Causes Of Financial Distress In Local Banks In Africa And Implications For Prudential Policy," UNCTAD Discussion Papers 132, United Nations Conference on Trade and Development.
    4. David T. Llewellyn, 2001. "A regulatory regime for financial stability," Working Papers 48, Oesterreichische Nationalbank (Austrian Central Bank).
    5. Beck, Thorsten, 2003. "The incentive-compatible design of deposit insurance and bank failure resolution : concepts and country studies," Policy Research Working Paper Series 3043, The World Bank.

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