Bail-Ins, Optimal Regulation, and Crisis Resolution

79 Pages Posted: 19 Sep 2019 Last revised: 5 Nov 2021

See all articles by Christopher Clayton

Christopher Clayton

Yale School of Management

Andreas Schaab

Columbia Business School

Date Written: November 04, 2021

Abstract

We provide a contracting framework to understand bank bail-in regimes. In the presence of a monitoring problem, the optimal bank capital structure combines standard debt, which induces liquidation and provides strong incentives, and bail-in debt, which restores solvency but provides weaker incentives. Socially optimal policy increases use of bail-in debt when fire sales make liquidation socially costly. The social optimum can also be implemented using an ex post resolution authority. Although bail-ins replace bailouts of existing debt, they can destabilize bank refinancing during market stress, giving a role for temporary guarantees of new long-term debt in the crisis resolution toolkit.

Suggested Citation

Clayton, Christopher and Schaab, Andreas, Bail-Ins, Optimal Regulation, and Crisis Resolution (November 04, 2021). Available at SSRN: https://ssrn.com/abstract=3455684 or http://dx.doi.org/10.2139/ssrn.3455684

Christopher Clayton (Contact Author)

Yale School of Management ( email )

Cambridge, MA
United States

Andreas Schaab

Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

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