Optimal Forbearance of Bank Resolution

Linda Schilling

No 14244, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We analyze optimal strategic delay of bank resolution (\grq forbearance') and deposit insurance coverage. After bad news on the bank's assets, depositors fear for the uninsured part of their deposit and withdraw while the regulator observes withdrawals and needs to decide when to intervene. Optimal policy maximizes the joint value of the demand deposit contract and the insurance fund to avoid inefficient risk-shifting towards the fund while also preventing inefficient runs. Under low insurance coverage, the optimal intervention policy is never to intervene (laissez-faire). Optimal deposit insurance coverage is always interior. The paper sheds light on the differences between the U.S. and the European Monetary Union concerning their bank resolution policies.

Keywords: Bank resolution; Deposit insurance; Global games; Suspension of convertibility; Bank run; Mandatory stay; Forbearance; Deposit freeze; Recovery rates (search for similar items in EconPapers)
JEL-codes: D8 E6 G21 G28 G33 (search for similar items in EconPapers)
Date: 2019-12
New Economics Papers: this item is included in nep-ban, nep-cba, nep-ias and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Working Paper: Optimal forbearance of bank resolution (2018)
Working Paper: Optimal Forbearance of Bank Resolution (2017)
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