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
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: Suggested Citation