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Bank resolution and shadow pricing of rural banks equity

Author

Listed:
  • Citra Amanda

    (The University of Auckland Business School
    Bank Indonesia Institute)

  • Dimitris Margaritis

    (The University of Auckland Business School)

  • Dulani Jayasuriya

    (The University of Auckland Business School)

Abstract

This study investigates the economic implications of bank resolution mechanisms on the cost of equity capital. By introducing the concept of a shadow price of equity as a forward-looking measure of recovery prospects, we provide a novel lens through which to evaluate the financial resilience of banks. Utilizing a unique dataset of rural banks, we show that deterioration in asset quality leads to a meaningful increase in the cost of capital, reflecting heightened investor risk perception and reduced confidence in the bank’s solvency. We find that banks experiencing higher shadow equity prices, suggestive of elevated capital costs, have systematically lower recovery rates in resolution scenarios. These findings highlight the economic value of operational efficiency and prudent risk management in enhancing resolution outcomes. Additionally, our results highlight the presence of a material implicit deposit insurance subsidy, which distorts market discipline and affects capital allocation in the banking sector.

Suggested Citation

  • Citra Amanda & Dimitris Margaritis & Dulani Jayasuriya, 2025. "Bank resolution and shadow pricing of rural banks equity," SN Business & Economics, Springer, vol. 5(11), pages 1-20, November.
    • Handle: RePEc:spr:snbeco:v:5:y:2025:i:11:d:10.1007_s43546-025-00947-z
    DOI: 10.1007/s43546-025-00947-z
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    Keywords

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    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • 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
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis

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