New Bank Resolution Mechanisms: Is It the End of the Bailout Era?

48 Pages Posted: 1 Jul 2020 Last revised: 14 Dec 2020

See all articles by Aneta Hryckiewicz

Aneta Hryckiewicz

Goethe University of Frankfurt; Kozminski University

Natalia Kryg

European Bank for Reconstruction and Development (EBRD)

Dimitrios P. Tsomocos

University of Oxford - Said Business School and St. Edmund Hall

Date Written: June 30, 2020

Abstract

We study the effectiveness of three common bank resolution mechanisms: bailouts, bank sales, and ‘bad banks’. We first apply the financial fragility model of Goodhart et al. (2005, 2006a) to analyze the impact of these resolution mechanisms on bank behavior. We then use a novel bank-level database on 39 countries that used these resolution mechanisms during 1992-2017 and analyze the relationship between the mechanisms applied and subsequent bank performance. We find that the effectiveness of resolution mechanisms depends crucially on the timing and severity of crises. While mergers can deliver good results at the beginning of a crisis, this is less likely at later stages of a crisis. In the event of severe crises, mechanisms aimed at restructuring bank balance sheets are most likely to deliver positive results. We find no support for bank bailouts as an optimal strategy. A calibration exercise shows that the effectiveness of resolution mechanisms to mitigate systemic risk declines with the severity of crises.

Keywords: Government Intervention, Resolution Mechanism, Financial Crisis, Bailout, Effectiveness, Moral Hazard, Financial Contagion, Bank Default, Financial Stability, General Equilibrium, Systemic Risk

JEL Classification: C68, G21, G28

Suggested Citation

Hryckiewicz, Aneta and Kryg, Natalia and Tsomocos, Dimitrios P., New Bank Resolution Mechanisms: Is It the End of the Bailout Era? (June 30, 2020). EBRD Working Paper No. 247, Available at SSRN: https://ssrn.com/abstract=3639644 or http://dx.doi.org/10.2139/ssrn.3639644

Aneta Hryckiewicz

Goethe University of Frankfurt ( email )

House of Finance, Grüneburgplatz 1
Frankfurt am Main, DE Hessen 60323
Germany

Kozminski University ( email )

Accounting Department
ul. Jagiellonska 57/59
Warsaw, 03-303
Poland
(22) 519 21 69 (Phone)

Natalia Kryg (Contact Author)

European Bank for Reconstruction and Development (EBRD) ( email )

One Exchange Square
London, EC2A 2EH
United Kingdom

Dimitrios P. Tsomocos

University of Oxford - Said Business School and St. Edmund Hall ( email )

Park End Street
Oxford, OX1 1HP
Great Britain
+44 1865 288 932 (Phone)
+44 1865 288 805 (Fax)

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