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

See all articles by Allen N. Berger

Allen N. Berger

University of South Carolina - Darla Moore School of Business; Wharton Financial Institutions Center; European Banking Center

Charles P. Himmelberg

Goldman, Sachs & Co.

Raluca A. Roman

Federal Reserve Bank of Philadelphia

Sergey Tsyplakov

University of South Carolina - Darla Moore School of Business

Date Written: May 19, 2019

Abstract

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

Berger, Allen N. and Himmelberg, Charles P. and Roman, Raluca A. and Tsyplakov, Sergey, Bank Bailouts, Bail-Ins, or No Regulatory Intervention? A Dynamic Model and Empirical Tests of Optimal Regulation (May 19, 2019). Available at SSRN: https://ssrn.com/abstract=3179226 or http://dx.doi.org/10.2139/ssrn.3179226

Allen N. Berger

University of South Carolina - Darla Moore School of Business ( email )

1705 College St
Francis M. Hipp Building
Columbia, SC 29208
United States
803-576-8440 (Phone)
803-777-6876 (Fax)

Wharton Financial Institutions Center

Philadelphia, PA 19104-6367
United States

European Banking Center

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Charles P. Himmelberg

Goldman, Sachs & Co. ( email )

200 West St
New York, NY 10233
917-343-3218 (Phone)

Raluca A. Roman (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Sergey Tsyplakov

University of South Carolina - Darla Moore School of Business ( email )

Francis M. Hipp Building
Finance Department
Columbia, SC 29208
United States
803-777-4669 (Phone)
803-777-6876 (Fax)

HOME PAGE: http://dmsweb.moore.sc.edu/tsyplakov/

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