Allocating losses: Bail-ins, bailouts and bank regulation

Todd Keister and Yuliyan Mitkov

Journal of Economic Theory, 2023, vol. 210, issue C

Abstract: We study the interaction between the government's bailout policy and a bank's willingness to impose losses on (or “bail in”) investors based on its private information. In the absence of regulation, bail-ins in the early stages of a crisis are too small, while bailouts are too large and too frequent. Moreover, the bank may face a run by informed investors, creating further distortions and leading to a larger bailout. We show how a regulator with limited information can raise welfare and, in some cases, improve financial stability. The optimal policy involves partial delegation: the regulator sets bounds on the size of the bank's bail-in, but allows the bank to choose within these bounds.

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)
Date: 2023
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Citations: View citations in EconPapers (7)

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Related works:
Working Paper: Allocating Losses: Bail-ins, Bailouts and Bank Regulation (2020)
Working Paper: Allocating Losses: Bail-ins, Bailouts and Bank Regulation (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:210:y:2023:i:c:s0022053123000686

DOI: 10.1016/j.jet.2023.105672

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