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Optimal Forbearance of Bank Resolution

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  • Schilling, Linda Marlene

Abstract

We analyze optimal strategic delay of bank resolution ('grq forbearance') and deposit insurance coverage. After bad news on the bank's assets, depositors fear for the uninsured part of their deposit and withdraw while the regulator observes withdrawals and needs to decide when to intervene. Optimal policy maximizes the joint value of the demand deposit contract and the insurance fund to avoid inefficient risk-shifting towards the fund while also preventing inefficient runs. Under low insurance coverage, the optimal intervention policy is never to intervene (laissez-faire). Optimal deposit insurance coverage is always interior. The paper sheds light on the differences between the U.S. and the European Monetary Union concerning their bank resolution policies.

Suggested Citation

  • Schilling, Linda Marlene, 2019. "Optimal Forbearance of Bank Resolution," CEPR Discussion Papers 14244, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:14244
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    1. Jesus Fernandez-Villaverde & Daniel Sanches & Linda Schilling & Harald Uhlig, 2021. "Central Bank Digital Currency: Central Banking For All?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 41, pages 225-242, July.
    2. Voellmy, Lukas, 2019. "Shadow banking and financial stability under limited deposit insurance," ESRB Working Paper Series 105, European Systemic Risk Board.

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    More about this item

    Keywords

    bank resolution; bank run; deposit freeze; deposit insurance; Forbearance; global games; mandatory stay; Recovery Rates; suspension of convertibility;
    All these keywords.

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • 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

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