A Theory of Failed Bank Resolution: Technological Change and Political Economics

DeYoung, Robert; Kowalik, Michal; Reidhill, Jack

doi:10.2139/ssrn.2165527

Cited by 7 publications

(6 citation statements)

References 37 publications

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“…Our work here complements recent work in DeYoung, Kowalik, and Reidhill (2013) and in White and Yorulmazer (2014). These articles also explicitly consider how di¤erent alternatives (or "technologies") for resolution a¤ect welfare.…”

supporting

confidence: 73%

“…White and Yorulmazer (2014) use a simple static model to present a review of the di¤erent interventions during the 2007-08 …nancial crisis. DeYoung, Kowalik, and Reidhill (2013) focus instead on the dynamic properties of the too-big-to-fail problem. They highlight that, as regulators get better at resolution, they can let large …rms fail at less cost to society (i.e., they are willing to implement harsher punishments to these …rms in equilibrium), which translates into less risk taken by …rms, and hence less failures, being sustained in a Markov equilibrium of the repeated game.…”

mentioning

confidence: 99%

“…This repeated game is complicated to analyze, so we do not explicitly study it here. For a simple model of this commitment problem without learning in a repeated game, seeDeYoung, Kowalik, and Reidhill (2013).…”

mentioning

confidence: 99%

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Understanding Living Wills

Jarque

Athreya

2016

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confidence: 73%

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Understanding Living Wills

Jarque

Athreya

2016

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“…Caballero and Simsek (2013) conceptualise complexity as the uncertainty of banks about their cross exposures: banks know their own exposures but they are uncertain about the exposures and the health of their counterparties in their business network. DeYoung, Kowalik, and Reidhill (2013) examine the relationship between the complexity of failed banks and the relevant resolution process. They document a too-complex-to-fail resolution strategy, which lies in the inability of regulators to credibly commit to closing insolvent complex banks thus encouraging banks to increase their level of complexity.…”

Section: Bank Size and Complexitymentioning

confidence: 99%

“Too‐Small‐To‐Survive” versus “Too‐Big‐To‐Fail” banks: The two sides of the same coin

Grammatikos

Papanikolaou

2018

Financial Market

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In the recent crisis, the U.S. authorities bailed out numerous banks through TARP, whilst let many others to fail as going concern entities. Even though both interventions fully protect depositors, a bail out represents an implied subsidy to shareholders, which is not yet the case with closures where creditors are not subsidised. We investigate this non‐uniform policy, demonstrating that size and not performance is the decision variable that endogenously determines one threshold below which banks are treated as TSTS by regulators and another one above which are considered to be TBTF. We, hence, provide a pair of economic rather than regulatory cut‐offs for TBTF and TSTS banks. The shareholders and the other uninsured creditors of a distressed bank are not bailed out if the bank is considered to be TSTS. We further document that the less complex a bank is, the less likely is to be bailed out and, hence, to have all of its creditors protected.

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“…The authority's announcement to close a bank may lose credibility if the bank is too large (''too big to fail''), the number of bank failures is large (''too many to fail''), or if the failing banks have become too complicated to be resolved (''too complicated to fail''). In all cases, the regulator may find it ex-post optimal to bail out some or all failed banks if bailout costs are smaller than social costs caused by liquidation (Mailath and Mester 1994;Yorulmazer 2007, 2008;DeYoung et al 2013).…”

Section: Crisis Resolution Obstaclesmentioning

confidence: 99%

What makes banking crisis resolution difficult? Lessons from Japan and the Nordic Countries

Diemer

Vollmer

2015

Eurasian Econ Rev

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Banking crisis resolution is often a long-lasting process with large fiscal and social costs. We ask which difficulties authorities face when choosing and implementing resolution packages. We survey the literature analyzing the impact of single resolution instruments on moral hazard and fiscal costs. We argue that no best-practice resolution package exists and that the implementation of a package is subject to coordination failures. Since crisis resolution packages are countryspecific, we follow a case-study approach and describe how regulators in Japan and the Nordic countries during the 1990s solved their financial crises. We identify several obstacles the authorities in these countries were faced with and analyse their crisis resolution in the context of moral hazard and fiscal costs. Finally, we use these lessons to reassess the policy reactions in the US and in Europe during the recent financial crisis.Keywords Banking crisis Á Resolution instruments Á Lender of last resort Á Owner of last resort Á Political coase theorem

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A Theory of Failed Bank Resolution: Technological Change and Political Economics

Cited by 7 publications

References 37 publications

Understanding Living Wills

Understanding Living Wills

“Too‐Small‐To‐Survive” versus “Too‐Big‐To‐Fail” banks: The two sides of the same coin

What makes banking crisis resolution difficult? Lessons from Japan and the Nordic Countries

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