Optimal timing of policy interventions in troubled banks

Philipp J. König, Paul Mayer and David Pothier

Journal of Financial Intermediation, 2024, vol. 60, issue C

Abstract: When will a policy authority (PA) resolve a bank whose solvency is uncertain? Delaying resolution gives the PA time to obtain information about the bank’s solvency. Delaying resolution also gives creditors time to withdraw funds, raising the cost of bailing out depositors. The optimal resolution date trades off these costs with the option value of making a more efficient resolution decision given new information. Providing liquidity support buys the PA time to wait for information, but increases its losses if the bank turns out to be insolvent. The PA may therefore optimally delay the provision of liquidity support.

Keywords: Bank resolution; Liquidity support; Equity injections; Banking crises (search for similar items in EconPapers)
JEL-codes: E58 G01 G21 G28 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinin:v:60:y:2024:i:c:s1042957324000445

DOI: 10.1016/j.jfi.2024.101116

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