Liquidation, Bailout, and Bail-In: Insolvency Resolution Mechanisms and Bank Lending

64 Pages Posted: 22 May 2019

See all articles by Bart M. Lambrecht

Bart M. Lambrecht

University of Cambridge - Judge Business School; Centre for Economic Policy Research (CEPR)

Alex S. L. Tse

Imperial College London

Multiple version iconThere are 2 versions of this paper

Date Written: May 2019

Abstract

We present a dynamic, continuous-time model in which risk averse inside equityholders set a bank's lending, payout, and financing policies, and the exposure of bank assets to crashes. We study how the prevailing insolvency resolution mechanism affects these policies, the insolvency rate, loss in default, value at risk (VaR), and the net value created by the bank. VaR depends non-trivially on jump (crash) risk, diffusion risk and the horizon. We examine the commonplace assertion that bailouts encourage excessive lending and risk-taking compared to the liquidation and bail-in regimes, and explore whether bailouts could be financed by banks without taxpayers' money.

Keywords: agency, asset sale, bail-in, bailout, Liquidation

JEL Classification: G32, G33, G34, H81

Suggested Citation

Lambrecht, Bart and Tse, Alex S. L., Liquidation, Bailout, and Bail-In: Insolvency Resolution Mechanisms and Bank Lending (May 2019). CEPR Discussion Paper No. DP13734. Available at SSRN: https://ssrn.com/abstract=3391081

Bart Lambrecht (Contact Author)

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom
44-(0)-1223-339700 (Phone)
44-(0)-1223-339701 (Fax)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Alex S. L. Tse

Imperial College London ( email )

South Kensington Campus
Imperial College London
London, London SW7 2AZ
United Kingdom

HOME PAGE: http://www.imperial.ac.uk/people/a.tse

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