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Bank Capital Forbearance

Natalya Martynova (), Enrico Perotti () and Javier Suarez

No 13617, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We analyze the strategic interaction between undercapitalized banks and a supervisor who may intervene by preventive recapitalization. Supervisory forbearance emerges because of a commitment problem, reinforced by fiscal costs and constrained capacity. Private incentives to comply are lower when supervisors have lower credibility, especially for highly levered banks. Less credible supervisors (facing higher cost of intervention) end up intervening more banks, yet producing higher forbearance and systemic costs of bank distress. Importantly, when public intervention capacity is constrained, private recapitalization decisions become strategic complements, leading to equilibria with extremely high forbearance and high systemic costs of bank failure.

Keywords: Bank Recapitalization; bank supervision; Forbearance (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba and nep-cfn
Date: 2019-03
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Working Paper: Bank Capital Forbearance (2019) Downloads
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