Citation

Discussion Paper Details

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Full Details

Title: Liquidation, bailout, and bail-in: Insolvency resolution mechanisms and bank lending.

Author(s): Bart Lambrecht and Alex Tse

Publication Date: May 2019

Keyword(s): agency, asset sale, bail-in, bailout and Liquidation

Programme Area(s): Financial Economics

Abstract: We present a dynamic, continuous-time model in which risk averse inside equityholders set a bank's lending, payout, and financing policies, and the exposure of bank assets to crashes. We study how the prevailing insolvency resolution mechanism affects these policies, the insolvency rate, loss in default, value at risk (VaR), and the net value created by the bank. VaR depends non-trivially on jump (crash) risk, diffusion risk and the horizon. We examine the commonplace assertion that bailouts encourage excessive lending and risk-taking compared to the liquidation and bail-in regimes, and explore whether bailouts could be financed by banks without taxpayers' money.

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Bibliographic Reference

Lambrecht, B and Tse, A. 2019. 'Liquidation, bailout, and bail-in: Insolvency resolution mechanisms and bank lending.'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=13734