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Too-international-to-fail? Supranational bank resolution and market discipline

Lucyna A. Górnicka and Marius Zoican ()

Journal of Banking & Finance, 2016, vol. 65, issue C, 41-58

Abstract: Supranational resolution of insolvent banks does not necessarily improve welfare. Supranational regulators are more inclined to bail-out banks indebted towards international creditors because they take into account cross-border contagion. When banks’ creditors are more likely to be bailed out, market discipline decreases and risk-taking by indebted banks increases. Depending on the trade-off between giving the right incentives ex ante and limiting contagion ex post, both a national and a supranational resolution framework can be optimal. In particular, if market discipline is low under both national and supranational resolution mechanisms, supranational resolution improves welfare as it stimulates interbank trade.

Keywords: Bank regulation; Market discipline; Moral hazard; Contagion (search for similar items in EconPapers)
JEL-codes: G15 G18 G21 (search for similar items in EconPapers)
Date: 2016
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Working Paper: Too-International-to-Fail? Supranational Bank Resolution and Market Discipline (2016)
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Handle: RePEc:eee:jbfina:v:65:y:2016:i:c:p:41-58