Bank Resolution, Risk-Taking and Claimholders' Bargaining Power

49 Pages Posted: 11 Jan 2019 Last revised: 4 Sep 2020

See all articles by Yuval Heller

Yuval Heller

Bar Ilan University

Sharon Peleg Lazar

Tel Aviv University

Alon Raviv

Bar-Ilan University - Graduate School of Business Administration

Date Written: January 9, 2019

Abstract

We study the influence of unsecured debt (subdebt) and of bail-in debt on banks' risk-taking in a contingent claim model, while considering the bargaining between stockholders and debtholders. We show that replacing stock with subdebt: (1) leads to fewer risk-shifting events, but generates a higher level of risk when stockholders have strong bargaining power, and (2) does not affect asset risk when side-payments are possible. Further, severe regulatory corrective measures might have adverse effects on risk-shifting. Finally, in a bank with bail-inable debt, an increase in debt write-down increases the magnitude, yet decreases the likelihood, of risk-shifting events.

Keywords: Risk-taking, asset risk, financial institutions, stress test, leverage, bargaining, bail-in debt.

JEL Classification: G20, G21, C78

Suggested Citation

Heller, Yuval and Peleg Lazar, Sharon and Raviv, Alon, Bank Resolution, Risk-Taking and Claimholders' Bargaining Power (January 9, 2019). Available at SSRN: https://ssrn.com/abstract=3312603 or http://dx.doi.org/10.2139/ssrn.3312603

Yuval Heller

Bar Ilan University ( email )

Dept. of Economics, Building 504
Bar Ilan University
Ramat Gan, 5290002
Israel
+972 5252 82182 (Phone)

HOME PAGE: http://https://sites.google.com/site/yuval26/

Sharon Peleg Lazar

Tel Aviv University ( email )

Tel Aviv
Israel

Alon Raviv (Contact Author)

Bar-Ilan University - Graduate School of Business Administration ( email )

The Graduate School of Business Administration
Ana and Max Web st
Ramat Gan
Israel

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