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
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)
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_1212_19
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