Liquidation, Bailout, and Bail-in: Insolvency Resolution Mechanisms and Bank Lending

53 Pages Posted: 22 Feb 2018 Last revised: 21 Nov 2019

See all articles by Bart M. Lambrecht

Bart M. Lambrecht

University of Cambridge - Judge Business School; Centre for Economic Policy Research (CEPR)

Alex S. L. Tse

Imperial College London

Multiple version iconThere are 2 versions of this paper

Date Written: May 7, 2019

Abstract

We present a dynamic, continuous-time model in which risk averse inside equityholders set a bank's lending, payout, and financing policies, and the exposure of bank assets to crashes. The effect of the prevailing insolvency resolution mechanism (IRM) on the probability of insolvency, loss in default, and the net value created by the bank suggests no single IRM is a panacea. We examine whether bailouts encourage excessive lending and risk-taking compared to bail-in or liquidation. We show how a bailout fund financed through a tax on bank dividends could resolve bailouts without public money and without distorting insiders' incentives.

Keywords: Liquidation, bailout, bail-in, asset sale, agency

JEL Classification: G33, H81, G34, G32

Suggested Citation

Lambrecht, Bart and Tse, Alex S. L., Liquidation, Bailout, and Bail-in: Insolvency Resolution Mechanisms and Bank Lending (May 7, 2019). Available at SSRN: https://ssrn.com/abstract=3123170 or http://dx.doi.org/10.2139/ssrn.3123170

Bart Lambrecht (Contact Author)

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom
44-(0)-1223-339700 (Phone)
44-(0)-1223-339701 (Fax)

Centre for Economic Policy Research (CEPR) ( email )

London
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Alex S. L. Tse

Imperial College London ( email )

South Kensington Campus
Imperial College London
London, London SW7 2AZ
United Kingdom

HOME PAGE: http://www.imperial.ac.uk/people/a.tse

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