Allocating Losses: Bail-ins, Bailouts and Bank Regulation

Todd Keister and Yuliyan Mitkov ()
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Yuliyan Mitkov: University of Bonn

No 49, ECONtribute Discussion Papers Series from University of Bonn and University of Cologne, Germany

Abstract: We study the interaction between a government's bailout policy and banks' willingness to impose losses on (or \bail in") their investors. The government has limited commitment and may choose to bail out banks facing large losses. The anticipation of this bailout undermines a bank's private incentive to impose a bail-in. In the resulting equilibrium, bail-ins are too small and bailouts are too large. Some banks may also face a run by informed investors, creating further distortions and leading to larger bailouts. We show how a regulator with limited information can raise welfare and improve financial stability by imposing a system-wide, mandatory bail-in at the onset of a crisis. In some situations, allowing banks to choose between meeting a minimum bail-in and opting out can raise welfare further.

Keywords: Bank bailouts; moral hazard; financial stability; banking regulation (search for similar items in EconPapers)
JEL-codes: E61 G18 G28 (search for similar items in EconPapers)
Pages: 68 pages
Date: 2020-12
New Economics Papers: this item is included in nep-ban and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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https://www.econtribute.de/RePEc/ajk/ajkdps/ECONtribute_049_2020.pdf First version, 2020 (application/pdf)

Related works:
Journal Article: Allocating losses: Bail-ins, bailouts and bank regulation (2023)
Working Paper: Allocating Losses: Bail-ins, Bailouts and Bank Regulation (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:ajk:ajkdps:049

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