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Bank resolution and public backstop in an asymmetric banking union

Anatoli Segura () and Sergio Vicente ()
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Anatoli Segura: Bank of Italy
Sergio Vicente: Queen Mary University of London

No 1212, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: This paper characterizes the optimal banking union with endogenous participation in a two-country economy in which domestic bank failures may be contemporaneous to sovereign crises, giving rise to risk-sharing motives to mutualize bail-out funding. Raising public funds to conduct bail-outs entails a deadweight loss. Bank bail-ins create disruption costs. The optimal resolution trades-off these costs. Truthfully eliciting information from domestic authorities imposes a domestic co-payment to fund bail-outs. When country asymmetry is large, ensuring the ex-ante participation of the fiscally stronger country requires a reduced contribution by this country, which increases the likelihood of bailing out its failing bank.

Keywords: banking union; bail-in; bail-out; public backstop; mechanism design (search for similar items in EconPapers)
JEL-codes: G01 G21 G28 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban
Date: 2019-03
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