Optimal Forbearance of Bank Resolution

This paper analyzes a regulator's optimal strategic delay of resolving banks when the regulator's announcement of the intervention delay endogenously affects the depositors' run propensity. Given intervention, the regulator either liquidates the remaining illiquid assets (“prompt corr...

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Bibliographic Details
Published in:The Journal of finance (New York) 2023-12, Vol.78 (6), p.3621-3675
Main Author: SCHILLING, LINDA M.
Format: Article
Language:English
Subjects:
Assets
Bank deposits
Bank liquidity
Banks
Intervention
Liquidation
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Summary:This paper analyzes a regulator's optimal strategic delay of resolving banks when the regulator's announcement of the intervention delay endogenously affects the depositors' run propensity. Given intervention, the regulator either liquidates the remaining illiquid assets (“prompt corrective action”) or continues managing the assets at a reduced skill level (“resolution under receivership”). In either case, I show that if the regulator tolerates fewer withdrawals until intervention, the depositors may react by preempting the regulator: they run on the bank more often ex ante. A policy of never intervening can leave the bank more stable than a conservative intervention policy.
ISSN:0022-1082
1540-6261
DOI:10.1111/jofi.13273