Bank Resolution Costs, Depositor Preference, and Asset Encumbrance

31 Pages Posted: 8 Aug 2013

See all articles by Daniel Hardy

Daniel Hardy

International Monetary Fund (IMF)

Date Written: July 2013

Abstract

Depositor preference and collateralization of borrowing may reduce the cost of settling the conflicts among creditors that arises in case of resolution or bankruptcy. This net benefit, which may be capitalized into the value of the bank rather than affect creditors’ expected returns, should result in lower overall funding costs and thus a lower probability of distress despite increasing encumbrance of the bank’s balance sheet. The benefit is maximized when resolution is initiated early enough for preferred depositors to remain fully protected.

Keywords: Bankruptcy, Bank resolution, Banks, Bankruptcy costs, bank resolution, depositor preference, asset encumbrance, banking, segmentation, bank funding, debt restructuring, deposit insurance, deposit guarantee, bank debt, interbank market, bank stability, probability of default, bank failure, banking crises, bank of england, banking system, bank liquidity, banks ? assets, banking crisis, bank capitalization, bankers ? association, banking distress, bank risk, banks ? balance sheets, bankers, federal deposit insurance, bank holding, bank restructuring, bank business, bank creditor, bank solvency, bank risk-shifting, bank owners, bank failure resolution, bank asset, failure resolution

JEL Classification: G21, G28, G33

Suggested Citation

Hardy, Daniel, Bank Resolution Costs, Depositor Preference, and Asset Encumbrance (July 2013). IMF Working Paper No. 13/172, Available at SSRN: https://ssrn.com/abstract=2307415

Daniel Hardy (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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