Working Paper: CEPR ID: DP14048
Authors: Lucy White; Ansgar Walther
Abstract: Recent reforms give regulators broad powers to “bail-in” bank creditors during financial crises.We analyze efficient bail-ins and their implementation. To preserve liquidity, regulators must avoidsignalling negative private information to creditors. Therefore, optimal bail-ins in bad times dependonly on public information. As a result, the optimal policy cannot be implemented if regulatorshave wide discretion, due to an informational time-inconsistency problem. Rules mandating toughbail-ins after bad public signals, or contingent convertible (co-co) bonds, improve welfare. Wefurther show that bail-in and bailout policies are complementary: if bailouts are possible, thendiscretionary bail-ins are more effective.
Keywords: bank resolution; financial crises; bailin; bailout; bank runs
JEL Codes: G01; G18; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| regulatory discretion (K20) | policy inefficiency (D61) |
| policy inefficiency (D61) | bank instability (F65) |
| regulatory rules (G18) | enhanced welfare outcomes (I38) |
| bailout policies (H81) | effectiveness of discretionary bailins (G28) |
| regulatory discretion (K20) | bank instability (F65) |