Rules versus Discretion in Bank Resolution

Ansgar Walther, Lucy White and Itay Goldstein

The Review of Financial Studies, 2020, vol. 33, issue 12, 5594-5629

Abstract: Recent reforms have given regulators broad powers to “bail-in” bank creditors during financial crises. We analyze efficient bail-ins and their implementation. To preserve liquidity, regulators must avoid signaling negative private information to creditors. Therefore, optimal bail-ins in bad times only depend on public information. As a result, the optimal policy cannot be implemented if regulators have wide discretion, due to an informational time-inconsistency problem. Rules mandating tough bail-ins after bad public signals, or contingent convertible (co-co) bonds, improve welfare. We further show that bail-in and bailout policies are complementary: if bailouts are possible, then discretionary bail-ins are more effective.

JEL-codes: G01 G18 G21 (search for similar items in EconPapers)
Date: 2020
References: Add references at CitEc
Citations: View citations in EconPapers (25)

Downloads: (external link)
http://hdl.handle.net/10.1093/rfs/hhaa032 (application/pdf)
Access to full text is restricted to subscribers.

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:oup:rfinst:v:33:y:2020:i:12:p:5594-5629.

Ordering information: This journal article can be ordered from
https://academic.oup.com/journals

Access Statistics for this article

The Review of Financial Studies is currently edited by Itay Goldstein

More articles in The Review of Financial Studies from Society for Financial Studies Oxford University Press, Journals Department, 2001 Evans Road, Cary, NC 27513 USA.. Contact information at EDIRC.
Bibliographic data for series maintained by Oxford University Press ().