Too-International-to-Fail? Supranational Bank Resolution and Market Discipline

Lucyna Anna Gornicka and Marius Zoican
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Lucyna Anna Gornicka: IMF - International Monetary Fund

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Abstract: Supranational resolution of insolvent banks does not necessarily improve welfare. Supranational regulators are more inclined to bail-out banks indebted towards international creditors because they take into account cross-border contagion. When banks' creditors are more likely to be bailed out, market discipline decreases and risk-taking by indebted banks increases. Depending on the trade-off between giving the right incentives ex ante and limiting contagion ex post, both a national and a supranational resolution framework can be optimal. In particular, if market discipline is low under both national and supranational resolution mechanisms, supranational resolution improves welfare as it stimulates interbank trade.

Keywords: bank regulation; market discipline; moral hazard; contagion (search for similar items in EconPapers)
Date: 2016
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Published in Journal of banking & finance = Journal of banking and finance, 2016

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01253632

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