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Rules versus Discretion in Bank Resolution

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  • Walther, Ansgar
  • White, Lucy

Abstract

Recent reforms give regulators broad powers to "bail-in" bank creditors during financial crises. We analyze efficient bail-ins and their implementation. To preserve liquidity, regulators must avoid signalling negative private information to creditors. Therefore, optimal bail-ins in bad times depend only on public information. As a result, the optimal policy cannot be implemented if regulators have wide discretion, due to an informational time-inconsistency problem. Rules mandating tough bail-ins after bad public signals, or contingent convertible (co-co) bonds, improve welfare. We further show that bail-in and bailout policies are complementary: if bailouts are possible, then discretionary bail-ins are more effective.

Suggested Citation

  • Walther, Ansgar & White, Lucy, 2019. "Rules versus Discretion in Bank Resolution," CEPR Discussion Papers 14048, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:14048
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    References listed on IDEAS

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    More about this item

    Keywords

    bail-in; bail-out; bank resolution; bank runs; financial crises;

    JEL classification:

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

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