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Optimal Forbearance of Bank Resolution

Author

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  • Schilling, Linda
Abstract
We analyze optimal strategic delay of bank resolution (\grq forbearance') and deposit insurance coverage. After bad news on the bank's assets, depositors fear for the uninsured part of their deposit and withdraw while the regulator observes withdrawals and needs to decide when to intervene. Optimal policy maximizes the joint value of the demand deposit contract and the insurance fund to avoid inefficient risk-shifting towards the fund while also preventing inefficient runs. Under low insurance coverage, the optimal intervention policy is never to intervene (laissez-faire). Optimal deposit insurance coverage is always interior. The paper sheds light on the differences between the U.S. and the European Monetary Union concerning their bank resolution policies.

Suggested Citation

  • Schilling, Linda, 2019. "Optimal Forbearance of Bank Resolution," CEPR Discussion Papers 14244, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:14244
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    Cited by:

    1. Jesus Fernandez-Villaverde & Daniel Sanches & Linda Schilling & Harald Uhlig, 2021. "Central Bank Digital Currency: Central Banking For All?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 41, pages 225-242, July.
    2. Schilling, Linda, 2023. "Smooth versus Harsh Regulatory Interventions and Policy Equivalence," MPRA Paper 116612, University Library of Munich, Germany.
    3. Schilling, Linda, 2017. "Optimal Forbearance of Bank Resolution," MPRA Paper 112409, University Library of Munich, Germany.
    4. Voellmy, Lukas, 2019. "Shadow banking and financial stability under limited deposit insurance," ESRB Working Paper Series 105, European Systemic Risk Board.
    5. König, Philipp Johann & Mayer, Paul & Pothier, David, 2022. "Optimal timing of policy interventions in troubled banks," Discussion Papers 10/2022, Deutsche Bundesbank.

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    More about this item

    Keywords

    Bank resolution; Deposit insurance; Global games; Suspension of convertibility; Bank run; Mandatory stay; Forbearance; Deposit freeze; Recovery rates;
    All these keywords.

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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