Liquidation, bailout, and bail-in: Insolvency resolution mechanisms and bank lending

Bart Lambrecht and Alex Tse

No 13734, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We present a dynamic, continuous-time model in which risk averse inside equityholders set a bank's lending, payout, and financing policies, and the exposure of bank assets to crashes. We study how the prevailing insolvency resolution mechanism affects these policies, the insolvency rate, loss in default, value at risk (VaR), and the net value created by the bank. VaR depends non-trivially on jump (crash) risk, diffusion risk and the horizon. We examine the commonplace assertion that bailouts encourage excessive lending and risk-taking compared to the liquidation and bail-in regimes, and explore whether bailouts could be financed by banks without taxpayers' money.

Keywords: Liquidation; Bailout; Bail-in; Asset sale; Agency (search for similar items in EconPapers)
JEL-codes: G32 G33 G34 H81 (search for similar items in EconPapers)
Date: 2019-05
New Economics Papers: this item is included in nep-ban and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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