Bank Capital Forbearance

Natalya Martynova, Enrico Perotti and Javier Suarez

Working Papers from CEMFI

Abstract: We analyze the strategic interaction between undercapitalized banks and a supervisor who may intervene by preventive recapitalization. Supervisory forbearance emerges because of a commitment problem, reinforced by fiscal costs and constrained capacity. Private incentives to comply are lower when supervisors have lower credibility, especially for highly levered banks. Less credible supervisors (facing higher cost of intervention) end up intervening more banks, yet producing higher forbearance and systemic costs of bank distress. Importantly, when public intervention capacity is constrained, private recapitalization decisions become strategic complements, leading to equilibria with extremely high forbearance and high systemic costs of bank failure.

Keywords: Bank supervision; bank recapitalization; forbearance. (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2019-03
New Economics Papers: this item is included in nep-ban
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
https://www.cemfi.es/ftp/wp/1908.pdf (application/pdf)

Related works:
Working Paper: Bank Capital Forbearance (2019)
Working Paper: Bank capital forbearance (2019)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cmf:wpaper:wp2019_1908

Access Statistics for this paper

More papers in Working Papers from CEMFI Contact information at EDIRC.
Bibliographic data for series maintained by Araceli Requerey ().