Financial Restructuring and Resolution of Banks

57 Pages Posted: 23 May 2018

Date Written: May 2, 2018

Abstract

How do resolution frameworks affect the private restructuring of distressed banks? We model a distressed bank’s shareholders and creditors negotiating a restructuring given asymmetric information about asset quality and externalities onto the government. This yields negotiation delays used to signal asset quality. We find that strict bail-in rules increase delays by worsening informational frictions and reducing bargaining surplus. We characterize optimal bail-in rules for the government. We then consider the government’s possible involvement in negotiations. We find this can lead to shorter or longer delays. Notably, the government may gin from committing not to partake in negotiations.

Keywords: Bank resolution, bail-out, bail-in, debt restructuring

JEL Classification: G21, G28

Suggested Citation

Colliard, Jean-Edouard and Gromb, Denis, Financial Restructuring and Resolution of Banks (May 2, 2018). HEC Paris Research Paper No. FIN-2018-1272. Available at SSRN: https://ssrn.com/abstract=3183777 or http://dx.doi.org/10.2139/ssrn.3183777

Jean-Edouard Colliard (Contact Author)

HEC Paris - Finance Department ( email )

France

Denis Gromb

HEC Paris

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France

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