Review of Financial Studies Vol. 33 No. 12 2020
Rules versus Discretion in Bank Resolution
Abstract
Recent reforms have given regulators broad powers to “bail-in” bank creditors during financial crises. We analyze efficient bail-ins and their implementation. To preserve liquidity, regulators must avoid signaling negative private information to creditors. Therefore, optimal bail-ins in bad times only depend on public information. As a result, the optimal policy cannot be implemented if regulators have wide discretion, due to an informational time-inconsistency problem. Rules mandating tough bail-ins after bad public signals, or contingent convertible (co-co) bonds, improve welfare. We further show that bail-in and bailout policies are complementary: if bailouts are possible, then discretionary bail-ins are more effective.
- DOI
- 10.1093/rfs/hhaa032
- Volume
- 33
- Issue
- 12
- Pages
- 5594-5629
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref