Bank Recovery and Resolution Planning, Liquidity Management and Fragility

Luca Deidda and Ettore Panetti

Working Paper CRENoS from Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia

Abstract: We study how regulation shapes the interaction between financial fragility and bank liquidity management, and propose a rationale for the complementarity between bank recovery and resolution planning. To this end, we analyze an economy in which a benevolent resolution authority sets a bank resolution plan to suspend deposit withdrawals and create a "good bank" at a cost in the event of a depositors' run. In such a framework, banks maximize expected welfare if deciding ex ante how to manage liquidity during runs. However, this choice is time inconsistent. Therefore, regulators need to force banks to commit to it through recovery planning.

Keywords: banks; Liquidity; financial fragility; financial regulation; resolution (search for similar items in EconPapers)
Date: 2024
New Economics Papers: this item is included in nep-ban, nep-cba and nep-fdg
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Persistent link: https://EconPapers.repec.org/RePEc:cns:cnscwp:202420

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