Too-International-to-Fail? Supranational Bank Resolution and Market Discipline

50 Pages Posted: 13 Nov 2013 Last revised: 17 Feb 2016

Date Written: January 12, 2016

Abstract

Supranational resolution of insolvent banks does not necessarily improve welfare. Supranational regulators are more inclined to bail-out banks indebted towards international creditors because they take into account cross-border contagion. When banks' creditors are more likely to be bailed out, market discipline decreases and risk-taking by indebted banks increases. Depending on the trade-off between giving the right incentives ex ante and limiting contagion ex post, both a national and a supranational resolution framework can be optimal. In particular, if market discipline is low under both national and supranational resolution mechanisms, supranational resolution improves welfare as it stimulates interbank trade.

Keywords: bank regulation, market discipline, moral hazard, contagion

JEL Classification: G15, G18, G21

Suggested Citation

Lucyna, Gόrnicka and Zoican, Marius, Too-International-to-Fail? Supranational Bank Resolution and Market Discipline (January 12, 2016). Journal of Banking and Finance, 65 (2016) 41–58; Paris December 2015 Finance Meeting EUROFIDAI - AFFI. Available at SSRN: https://ssrn.com/abstract=2353290 or http://dx.doi.org/10.2139/ssrn.2353290

Gόrnicka Lucyna

IMF ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Marius Zoican (Contact Author)

University of Toronto - Finance Area ( email )

105 St George Street
Toronto, Ontario M5S 3E6
Canada

HOME PAGE: http://www.mariuszoican.org

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