Capital forbearance in the bank recovery and resolution game

Natalya Martynova, Enrico Perotti and Javier Suarez

Journal of Financial Economics, 2022, vol. 146, issue 3, 884-904

Abstract: We analyze the strategic interaction between undercapitalized banks and a supervisor in a recovery and resolution framework in which early recapitalizations can prevent later disorderly failures. Capital forbearance emerges because reputational, political, economic and fiscal costs undermine supervisors’ commitment to publicly resolve the banks that miss the request to privately recover. Under a weaker resolution threat, banks’ incentives to recover are lower and supervisors may end up having to resolve more banks. When marginal resolution costs steeply increase with the scale of the intervention, private recovery actions become strategic complements, producing too-many-to-resolve equilibria with high forbearance and high systemic costs.

Keywords: Bank supervision; Bank recapitalization; Forbearance (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304405X2200191X
Full text for ScienceDirect subscribers only

Related works:
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:eee:jfinec:v:146:y:2022:i:3:p:884-904

DOI: 10.1016/j.jfineco.2022.09.006

Access Statistics for this article

Journal of Financial Economics is currently edited by G. William Schwert

More articles in Journal of Financial Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().