Bail-in vs bail-out: Bank resolution and liability structure

Alessandro Sbuelz; Andrea Tarelli; Luca Leanza

doi:10.1016/j.irfa.2020.101642

Bail-in vs bail-out: Bank resolution and liability structure

Alessandro Sbuelz, Andrea Tarelli, Luca Leanza

Research output: Contribution to journal › Article › peer-review

Abstract

What is the joint impact of different resolution regimes and capital requirements on the optimal liability structure of a bank holding insured deposits and issuing non-bail-inable debt and bail-inable Tier1-capital debt? We address this novel question and find that: (1) a credible bail-in resolution regime rules out extreme leverage and creates value by postponing default; (2) a positive probability of bail-out destroys credibility with dramatic effects on financial risk-taking, to the point of reversing the classical positive link between optimal leverage and growth prospects; and (3) a strict enforcement of the Basel III CET1 capital requirement strongly mitigates the impact of a non-credible resolution regime.

Original language	English
Pages (from-to)	N/A-N/A
Journal	International Review of Financial Analysis
Volume	73
DOIs	https://doi.org/10.1016/j.irfa.2020.101642
Publication status	Published - 2021

Keywords

Bail-in
Bail-out
Bank capital structure
Endogenous default

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10.1016/j.irfa.2020.101642

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title = "Bail-in vs bail-out: Bank resolution and liability structure",

abstract = "What is the joint impact of different resolution regimes and capital requirements on the optimal liability structure of a bank holding insured deposits and issuing non-bail-inable debt and bail-inable Tier1-capital debt? We address this novel question and find that: (1) a credible bail-in resolution regime rules out extreme leverage and creates value by postponing default; (2) a positive probability of bail-out destroys credibility with dramatic effects on financial risk-taking, to the point of reversing the classical positive link between optimal leverage and growth prospects; and (3) a strict enforcement of the Basel III CET1 capital requirement strongly mitigates the impact of a non-credible resolution regime.",

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T1 - Bail-in vs bail-out: Bank resolution and liability structure

AU - Sbuelz, Alessandro

AU - Tarelli, Andrea

AU - Leanza, Luca

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N2 - What is the joint impact of different resolution regimes and capital requirements on the optimal liability structure of a bank holding insured deposits and issuing non-bail-inable debt and bail-inable Tier1-capital debt? We address this novel question and find that: (1) a credible bail-in resolution regime rules out extreme leverage and creates value by postponing default; (2) a positive probability of bail-out destroys credibility with dramatic effects on financial risk-taking, to the point of reversing the classical positive link between optimal leverage and growth prospects; and (3) a strict enforcement of the Basel III CET1 capital requirement strongly mitigates the impact of a non-credible resolution regime.

AB - What is the joint impact of different resolution regimes and capital requirements on the optimal liability structure of a bank holding insured deposits and issuing non-bail-inable debt and bail-inable Tier1-capital debt? We address this novel question and find that: (1) a credible bail-in resolution regime rules out extreme leverage and creates value by postponing default; (2) a positive probability of bail-out destroys credibility with dramatic effects on financial risk-taking, to the point of reversing the classical positive link between optimal leverage and growth prospects; and (3) a strict enforcement of the Basel III CET1 capital requirement strongly mitigates the impact of a non-credible resolution regime.

KW - Bail-in

KW - Bail-out

KW - Bank capital structure

KW - Endogenous default

KW - Bail-in

KW - Bail-out

KW - Bank capital structure

KW - Endogenous default

UR - http://hdl.handle.net/10807/165385

UR - https://www.sciencedirect.com/science/article/abs/pii/s1057521920302830

U2 - 10.1016/j.irfa.2020.101642

DO - 10.1016/j.irfa.2020.101642

M3 - Article

VL - 73

SP - N/A-N/A

JO - International Review of Financial Analysis

JF - International Review of Financial Analysis

SN - 1057-5219

ER -

Bail-in vs bail-out: Bank resolution and liability structure

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Keywords

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