Speedy Bankruptcy Procedures and Bank Bailouts

To reduce the future occurrence of bank bailouts, after the global financial crisis of 2008, the financial stability policies seem to settle into stronger prudential regulations (e.g., capital requirements) and speedier bankruptcy procedures especially for big banks (e.g., living wills). Speedier bankruptcy procedures have also been adopted to help heavily indebted households and corporations in many countries. However, I argue here an opposite consequence. Because of simple and speedy bankruptcy procedures, along with prudential regulations, bank bailouts can be justified in a crisis. This result emerges as an implication of optimal contracts in general equilibrium with an endogenous, competitive banking sector.