Banking Crises and Bank Rescues: the Role of Reputation
This paper focuses on bank rescue packages and on banks' responses to rescue offers made during banking crises. A puzzling feature of experience with banking crises is that in many cases policy authorities make offers of bank rescue, but banks are reluctant to accept these offers. Asymmetric information between banks and outsiders regarding the extent of bad loans on banks' balance sheets is a common feature of banking crises. We study situations in which regulators have decided to offer rescue plans, and we show that banks' reputational concerns can have implications for the circumstances under which they will accept rescue offers. Even when the conditions accompanying a recapitalization plan are very "soft," banks may refuse to accept the offer. In order to compensate bankers for the negative reputational effects of accepting the plan, regulators may have to offer large amounts of recapitalization that are unrelated to the degree of the banks' solvency. In an optimal rescue plan the regulator will refrain from imposing punishment on banks that accept recapitalization; however, the regulator will impose costs on bankers who reject the rescue offer then perform poorly. Yet, even when the regulator takes account of bankers' reputational concerns in designing a rescue plan, rejection of the plan may occur in equilibrium. Strong bank supervisory systems aid the regulator who opts for bank rescues: when bank supervision is strong, banks will accept an offer of rescue with a lower amount of recapitalization than when bank supervision is weak. This suggests one explanation for international differences in experience with bank rescues.
|Date of creation:||01 Aug 2000|
|Date of revision:|
|Contact details of provider:|| Phone: 1 212 998 3820|
Fax: 1 212 995 4487
Web page: http://www.econometricsociety.org/pastmeetings.asp
More information through EDIRC
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.:
- Jean-Charles Rochet & Jean Tirole, 1996.
"Interbank lending and systemic risk,"
Board of Governors of the Federal Reserve System (U.S.), pages 733-765.
- Raghuram G. Rajan, 1994. "Why Bank Credit Policies Fluctuate: A Theory and Some Evidence," The Quarterly Journal of Economics, Oxford University Press, vol. 109(2), pages 399-441.
- Elizabeth McQuerry, 1999. "The banking sector rescue in Mexico," Economic Review, Federal Reserve Bank of Atlanta, issue Q3, pages 14-29.
- George J. Mailath & Loretta J. Mester, 1991.
"When do regulators close banks? When should they?,"
91-24, Federal Reserve Bank of Philadelphia.
- Mitchell, Janet, 1998. "Strategic Creditor Passivity, Regulation and Bank Bailouts," CEPR Discussion Papers 1780, C.E.P.R. Discussion Papers.
- Boot, Arnoud W A & Thakor, Anjan V, 1993. "Self-Interested Bank Regulation," American Economic Review, American Economic Association, vol. 83(2), pages 206-12, May.
- Mathias Dewatripont & Jean Tirole, 1994. "The prudential regulation of banks," ULB Institutional Repository 2013/9539, ULB -- Universite Libre de Bruxelles.
When requesting a correction, please mention this item's handle: RePEc:ecm:wc2000:0676. 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: (Christopher F. Baum)
If references are entirely missing, you can add them using this form.