Journal of Financial Economics Vol. 146 No. 3 2022
Capital forbearance in the bank recovery and resolution game
Abstract
We analyze the strategic interaction between undercapitalized banks and a supervisor in a recovery and resolution framework in which early recapitalizations can prevent later disorderly failures. Capital forbearance emerges because reputational, political, economic and fiscal costs undermine supervisors’ commitment to publicly resolve the banks that miss the request to privately recover. Under a weaker resolution threat, banks’ incentives to recover are lower and supervisors may end up having to resolve more banks. When marginal resolution costs steeply increase with the scale of the intervention, private recovery actions become strategic complements, producing too-many-to-resolve equilibria with high forbearance and high systemic costs.
- DOI
- 10.1016/j.jfineco.2022.09.006
- Volume
- 146
- Issue
- 3
- Pages
- 884-904
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref