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The Macroeconomic Effectiveness of Bank Bail-ins

Matthijs Katz and Christiaan van der Kwaak

No 2018009-EEF, Research Report from University of Groningen, Research Institute SOM (Systems, Organisations and Management)

Abstract: We examine the macroeconomic implications of bailing-in banks? creditors after a systemic financial crisis, whereby bank debt is partially written off. We do so within a RBC model that features an endogenous leverage constraint which limits the size of banks? balance sheets by the amount of bank net worth. Our simulations show that an unanticipated bail-in effectively ameliorates macroeconomic conditions as more net worth relaxes leverage constraints, which allows an expansion of investment. In contrast, an anticipated bail-in will be priced in ex-ante by bank creditors, thereby transferring the bail-in gains from banks to creditors. Therefore the intervention has zero impact on the macroeconomy relative to the no bail-in case. The effectiveness of the bail-in policy can be restored by implementing a temporary tax on debt outflows once creditors start to anticipate a bail-in.

New Economics Papers: this item is included in nep-ban, nep-cba, nep-fdg, nep-mac and nep-mon
Date: 2018
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