Bail-in vs. Bailout: a False Dilemma?

Lorenzo Pandolfi

CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy

Abstract: This paper analyzes the effects of bail-in policies on banks’ funding cost, incentives for loan monitoring, and financing capacity. In a model with moral hazard and two investment stages, a full bail-in turns out to be, ex post, the first-best policy to deal with failing banks. As a consequence, however, investors expect bail-ins rather than bailouts. Ex ante, this raises banks’ cost of debt and depresses bankers’ incentives to monitor. When moral hazard is severe, this time inconsistency leads to a credit market collapse unless the government pre-commits to an alternative resolution policy. The optimal policy is either a combination of bail-in and bailout or liquidation, depending on the severity of moral hazard and the shadow cost of the partial bailout.

Keywords: bail-in; bailout; moral hazard, resolution policies; bank regulation. (search for similar items in EconPapers)
JEL-codes: D82 E58 G21 G28 (search for similar items in EconPapers)
Date: 2018-05-22
New Economics Papers: this item is included in nep-ban, nep-cba and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Forthcoming in Journal of Financial Economics

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Persistent link: https://EconPapers.repec.org/RePEc:sef:csefwp:499

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