Bank Bailouts, Bail-Ins, or No Regulatory Intervention? A Dynamic Model and Empirical Tests of Optimal Regulation
69 Pages Posted: 24 May 2018 Last revised: 21 May 2019
Date Written: May 19, 2019
We develop and test a dynamic model of optimal regulatory design of three regimes to deal with distress of large banking organizations. These are 1) bailout, as under TARP; 2) bail-in, as under Orderly Liquidation Authority; and 3) no regulatory intervention, as under Financial CHOICE Act. We ﬁnd that no regulatory intervention is suboptimal relative to the other two regimes and that only bail-in provides incentives for banks to rebuild capital preemptively during distress. Empirical tests of changes in capital ratios and speeds of adjustment when shifting from the pre-crisis bailout regime to the post-crisis bail-in regime corroborate model predictions.
Keywords: Banks, Bailouts, Bail-Ins, OLA, Bankruptcy, Regulation, Capital Structure
JEL Classification: G21, G28
Suggested Citation: Suggested Citation