Bank Resolution and Public Backstop in an Asymmetric Banking Union

59 Pages Posted: 5 Nov 2020

See all articles by Anatoli Segura

Anatoli Segura

Bank of Italy

Sergio Vicente

Universidad Carlos III de Madrid; Queen Mary University of London

Date Written: August, 2018

Abstract

This paper characterizes the optimal banking union with endogenous participation in a two-country economy in which domestic bank failures may be contemporaneous to sovereign crises, giving rise to risk-sharing motives to mutualize the funding of bail-outs. Raising public funds to conduct a bail-out entails the deadweight loss of distortionary taxation. Bank bail-ins create disruption costs in the economy. When country asymmetry is large, resolution policies exhibit reduced contributions to the public backstop and forbearance in early bank intervention in the fiscally stronger country, facilitating bail-outs in this country.

Keywords: bail-in, bailout, banking union, mechanism design, public backstop

JEL Classification: G01, G21, G28

Suggested Citation

Segura, Anatoli and Vicente, Sergio and Vicente, Sergio, Bank Resolution and Public Backstop in an Asymmetric Banking Union (August, 2018). ESRB: Working Paper Series No. 2018/83, Available at SSRN: https://ssrn.com/abstract=3723431 or http://dx.doi.org/10.2139/ssrn.3723431

Anatoli Segura (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Sergio Vicente

Universidad Carlos III de Madrid ( email )

CL. de Madrid 126
Madrid, Madrid 28903
Spain

Queen Mary University of London ( email )

Mile End Road
LONDON, E1 4NS
United Kingdom

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