Wishful Thinking or Effective Threat? Tightening Bank Resolution Regimes and Bank Risk-Taking

55 Pages Posted: 5 Apr 2014

See all articles by Magdalena Ignatowski

Magdalena Ignatowski

Goethe University Frankfurt - Faculty of Economics and Business Administration

Josef Korte

Goethe University Frankfurt - Faculty of Economics and Business Administration

Date Written: March 13, 2014

Abstract

We propose a framework for testing the effects of changes in bank resolution regimes on bank behaviour. By exploiting the differential relevance of recent changes in U.S. bank resolution (i.e., the introduction of the Orderly Liquidation Authority, OLA) for different types of banks, we are able to simulate a quasi-natural experiment using a difference-in-difference framework. We find that banks that are more affected by the introduction of the OLA (1) significantly decrease their overall risk-taking and (2) shift their business model and loan origination towards lower risk, indicating the general effectiveness of the regime change. This effect, however, does (3) not hold for the largest and most systemically important banks. Hence, the introduction of the OLA in the U.S. alone does not appear to have solved the too-big-to-fail problem and might need to be complemented with other measures to limit financial institutions' risk-taking.

Keywords: bank resolution, bank insolvency, Orderly Liquidation Authority, FDIC, bank behavior, risk-taking

JEL Classification: G21, G28, G33

Suggested Citation

Ignatowski, Magdalena and Korte, Josef, Wishful Thinking or Effective Threat? Tightening Bank Resolution Regimes and Bank Risk-Taking (March 13, 2014). ECB Working Paper No. 1659. Available at SSRN: https://ssrn.com/abstract=2408447

Magdalena Ignatowski (Contact Author)

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Mertonstrasse 17-25
Frankfurt am Main, D-60325
Germany

Josef Korte

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Mertonstrasse 17-25
Frankfurt am Main, D-60325
Germany

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
188
Abstract Views
1,127
rank
172,745
PlumX Metrics