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Bank Recovery and Resolution Planning, Liquidity Management and Fragility

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Abstract

We study how regulation shapes the interaction between financial fragility and bank liquidity management, and propose a rationale for the complementarity between bank recovery and resolution planning. To this end, we analyze an economy in which a benevolent resolution authority sets a bank resolution plan to suspend deposit withdrawals and create a "good bank" at a cost in the event of a depositors' run. In such a framework, banks maximize expected welfare if deciding ex ante how to manage liquidity during runs. However, this choice is time inconsistent. Therefore, regulators need to force banks to commit to it through recovery planning.

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  • L. Deidda & E. Panetti, 2024. "Bank Recovery and Resolution Planning, Liquidity Management and Fragility," Working Paper CRENoS 202420, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
    • Handle: RePEc:cns:cnscwp:202420
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    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • 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

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