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The Economic Perspective of Bank Bankruptcy Law

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  • Matej Marinc
  • Razvan Vlahu

Abstract

This paper argues that a special bank bankruptcy regime is desirable for the efficient restructuring and/or liquidation of distressed banks. We first explore the principal features of corporate bankruptcy law. Next, we examine the specific characteristics that distinguish banks from other corporations, and argue that these features are largely neglected in corporate bankruptcy law. Finally, we make recommendations for optimal closure and reorganization policies, which should allow regulators to better mitigate disruptions in the financial system and minimize the social costs of bank distress. We compare the U.S., UK, and German bank bankruptcy frameworks and describe the EU framework for cross-border bank bankruptcy. We support our recommendations with a discussion of the Lehman Brothers and Fortis bank failures.

Suggested Citation

  • Matej Marinc & Razvan Vlahu, 2011. "The Economic Perspective of Bank Bankruptcy Law," DNB Working Papers 310, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:dnbwpp:310
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    Cited by:

    1. Ignatowski, Magdalena & Korte, Josef, 2014. "Wishful thinking or effective threat? Tightening bank resolution regimes and bank risk-taking," Journal of Financial Stability, Elsevier, pages 264-281.
    2. Jaka Cepec & Mitja Kovac, 2016. "Carrots and Sticks as Incentive Mechanisms for the Optimal Initiation of Insolvency Proceedings," DANUBE: Law and Economics Review, European Association Comenius - EACO, issue 2, pages 79-103, June.
    3. Massimiliano Caporin & Chia-Lin Chang & Michael McAleer, 2016. "Are the S&P 500 Index and Crude Oil, Natural Gas and Ethanol Futures Related for Intra-Day Data?," Documentos de Trabajo del ICAE 2016-01, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
    4. Chan, Stephanie & van Wijnbergen, Sweder, 2016. "CoCo Design, Risk Shifting and Financial Fragility," CEPR Discussion Papers 11099, C.E.P.R. Discussion Papers.
    5. Korte, Josef, 2015. "Catharsis—The real effects of bank insolvency and resolution," Journal of Financial Stability, Elsevier, pages 213-231.
    6. Lev Ratnovski, 2013. "Competition Policy for Modern Banks," IMF Working Papers 13/126, International Monetary Fund.
    7. Korte, Josef, 2013. "Catharsis - The Real Effects of Bank Insolvency and Resolution," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79938, Verein für Socialpolitik / German Economic Association.
    8. DeYoung, Robert & Kowalik, Michal & Reidhill, Jack, 2013. "A theory of failed bank resolution: Technological change and political economics," Journal of Financial Stability, Elsevier, pages 612-627.
    9. Briglevics, Tamas & Schuh, Scott, 2013. "U.S. consumer demand for cash in the era of low interest rates and electronic payments," Working Papers 13-23, Federal Reserve Bank of Boston.

    More about this item

    Keywords

    bank bankruptcy law; corporate bankruptcy law; bankruptcy regimes; bank failures; optimal resolution;

    JEL classification:

    • 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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