Bail-In vs Bail-Out: Bank Resolution and Liability Structure

56 Pages Posted: 17 Feb 2019 Last revised: 30 Sep 2019

See all articles by Luca Leanza

Luca Leanza

Catholic University of Milan; University of Milano-Bicocca

Alessandro Sbuelz

Catholic University of Milan - Department of Mathematics, Quantitative Finance, and Econometrics; Bocconi University - CAREFIN - Centre for Applied Research in Finance

Andrea Tarelli

Catholic University of Milan

Date Written: September 25, 2019

Abstract

What is the joint impact of different resolution regimes and capital requirements on the optimal liability structure of a bank holding insured deposits and issuing non-bail-inable debt and bail-inable Tier1-capital debt? We address this novel question and find that: 1) a credible bail-in resolution regime rules out extreme leverage and creates value by postponing default; 2) a positive probability of bail-out destroys credibility with dramatic effects on financial risk-taking, to the point of reversing the classical positive link between optimal leverage and growth prospects; and 3) a strict enforcement of the Basel III CET1 capital requirement strongly mitigates the impact of a non-credible resolution regime.

Keywords: Bank Capital Structure, Endogenous Default, Bail-In, Bail-Out

JEL Classification: G01, G21, G28, G32, G33

Suggested Citation

Leanza, Luca and Sbuelz, Alessandro and Tarelli, Andrea, Bail-In vs Bail-Out: Bank Resolution and Liability Structure (September 25, 2019). Available at SSRN: https://ssrn.com/abstract=3330032 or http://dx.doi.org/10.2139/ssrn.3330032

Luca Leanza

Catholic University of Milan ( email )

Largo Gemelli 1
Milan, MI Milano 20123
Italy

University of Milano-Bicocca ( email )

Piazza Ateneo Nuovo 1
Italy, MI Milano 20126
Italy

Alessandro Sbuelz

Catholic University of Milan - Department of Mathematics, Quantitative Finance, and Econometrics ( email )

largo A. Gemelli 1
I-20123 Milan
Italy
+39 02 7234 2345 (Phone)
+39 02 7234 2671 (Fax)

HOME PAGE: http://ppd.unicatt.it/docenti/alessandro_sbuelz

Bocconi University - CAREFIN - Centre for Applied Research in Finance

Via Sarfatti, 25
Milan, 20136
Italy

Andrea Tarelli (Contact Author)

Catholic University of Milan ( email )

Largo Gemelli, 1
Milan, 20123
Italy

HOME PAGE: http://sites.google.com/view/andreatarelli

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