Bank resolution: a framework for the assessment of regulatory intervention

Mathias Dewatripont and Xavier Freixas (xavier.freixas@upf.edu)

Oxford Review of Economic Policy, 2011, vol. 27, issue 3, 411-436

Abstract: More than ever, the current crisis has highlighted the cost of banking crises in budgetary and economic growth terms. Whether or not to restructure a bank is a key determinant of who bears the costs. The present article surveys the main issues concerning banks' restructuring, by considering the bargaining game that is played between regulators and shareholders when a bank is in distress. This revolves around the framework of negotiation that was established by the regulator, the fall-back position which is determined by bankruptcy legislation, and the objective function of the regulator. In this context, we argue that it is possible to improve upon existing restructuring mechanisms by making banks' bail-outs less costly to taxpayers and improving the ex ante incentives of banks' managers and shareholders. Copyright 2011, Oxford University Press.

Date: 2011
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