An Analysis of Closure Policy under Alternative Regulatory Structures
The author develops a theoretical model of bank closure. The regulatory decision about bank failure consists of two parts: whether to close and how to close. Assuming that the closure decision is credible, the welfare implications of two resolution regimes are considered. In one case, a meta-regulator supervises, closes, and resolves failed banks using an ex post efficient criterion. In the other case, a supervisor closes the bank while a deposit insurer resolves the closure on the basis of least cost. The bank chooses the riskiness of its loan portfolio in response to the announced policy. The supervisor can limit risk-shifting incentives of banks ex ante by raising capital requirements. The cost of this decision is a misallocation of economic resources, since some welfare-enhancing projects are abandoned. Market discipline is determined both exogenously, by the level of uninsured depositors, and endogeneously, by the regime and capital requirements chosen. Least costly resolution weakly dominates an ex post efficient resolution decision when market discipline is present. Neither mechanism outperforms when it is reliant on capital regulation in the absence of market discipline.
|Date of creation:||2005|
|Date of revision:|
|Contact details of provider:|| Postal: 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada|
Phone: 613 782-8845
Fax: 613 782-8874
Web page: http://www.bank-banque-canada.ca/
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Charles M. Kahn & João A. C. Santos, 2001.
"Allocating bank regulatory powers: lender of last resort, deposit insurance and supervision,"
BIS Working Papers
102, Bank for International Settlements.
- Kahn, Charles M. & Santos, Joao A.C., 2005. "Allocating bank regulatory powers: Lender of last resort, deposit insurance and supervision," European Economic Review, Elsevier, vol. 49(8), pages 2107-2136, November.
- Charles M. Kahn & João A.C. Santos, 2001. "Allocating bank regulatory powers: lender of last resort, deposit insurance, and supervision," Proceedings 717, Federal Reserve Bank of Chicago.
- George J. Mailath & Loretta J. Mester, 1993.
"A positive analysis of bank closure,"
94-2, Federal Reserve Bank of Philadelphia.
- By Charles Enoch & Gillian Garcia & V. Sundararajan, 2001. "Recapitalizing Banks with Public Funds," IMF Staff Papers, Palgrave Macmillan, vol. 48(1), pages 3.
- Kareken, John H & Wallace, Neil, 1978. "Deposit Insurance and Bank Regulation: A Partial-Equilibrium Exposition," The Journal of Business, University of Chicago Press, vol. 51(3), pages 413-38, July.
- 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.
- Diamond, Douglas W & Dybvig, Philip H, 1983.
"Bank Runs, Deposit Insurance, and Liquidity,"
Journal of Political Economy,
University of Chicago Press, vol. 91(3), pages 401-19, June.
- G. G. Garcia, 1999. "Deposit Insurance; A Survey of Actual and Best Practices," IMF Working Papers 99/54, International Monetary Fund.
- Bryant, John, 1980. "A model of reserves, bank runs, and deposit insurance," Journal of Banking & Finance, Elsevier, vol. 4(4), pages 335-344, December.
When requesting a correction, please mention this item's handle: RePEc:bca:bocawp:05-11. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.