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Optimal Forbearance of Bank Resolution

Linda Schilling

No 2018-15, Working Papers from Becker Friedman Institute for Research In Economics

Abstract: We analyze optimal strategic delay of bank resolution ('forbearance') and deposit insurance in a setting where, after bad news on the bank, depositors fear for the uninsured part of their deposit and withdraw while the regulator observes withdrawals and needs to decide when to intervene. Under low insurance coverage the optimal intervention policy is to walk away. Optimal deposit insurance coverage is always interior. Fast intervention cannot minimize public losses and be optimal at the same time. The paper sheds light on the differences between the U.S. and the European Monetary Union in terms of their bank resolution policies.

Keywords: Bank resolution; suspension of convertibility; mandatory stay; forbear- ance; bank run; deposit insurance; deposit freeze; recovery rates; global games (search for similar items in EconPapers)
JEL-codes: G28 G21 G33 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cba and nep-ias
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:bfi:wpaper:2018-15

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