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Rules versus Discretion in Bank Resolution

Ansgar Walther and Lucy White

No 14048, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Recent reforms give 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 signalling negative private information to creditors. Therefore, optimal bail-ins in bad times depend only 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.

Keywords: bail-in; bail-out; bank resolution; bank runs; financial crises (search for similar items in EconPapers)
JEL-codes: G01 G18 G21 (search for similar items in EconPapers)
Date: 2019-10
New Economics Papers: this item is included in nep-ban, nep-cba and nep-mic
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