Bank Capital Forbearance

37 Pages Posted: 5 Nov 2020

See all articles by Natalya Martynova

Natalya Martynova

Deutsche Bundesbank - Research Centre

Enrico Perotti

University of Amsterdam

Javier Suarez

Centre for Monetary and Financial Studies (CEMFI); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Date Written: May, 2019

Abstract

We analyze the strategic interaction between undercapitalized banks and a supervisor who may intervene by preventive recapitalization. Supervisory forbearance emerges because of a commitment problem, reinforced by fiscal costs and constrained capacity. Private incentives to comply are lower when supervisors have lower credibility, especially for highly levered banks. Less credible supervisors (facing higher cost of intervention) end up intervening more banks, yet producing higher forbearance and systemic costs of bank distress. Importantly, when public intervention capacity is constrained, private recapitalization decisions become strategic complements, leading to equilibria with extremely high forbearance and high systemic costs of bank failure.

Keywords: bank recapitalization, bank supervision, forbearance

JEL Classification: G21, G28

Suggested Citation

Martynova, Natalya and Perotti, Enrico and Suarez, Javier, Bank Capital Forbearance (May, 2019). ESRB: Working Paper Series No. 2019/93, Available at SSRN: https://ssrn.com/abstract=3723455 or http://dx.doi.org/10.2139/ssrn.3723455

Natalya Martynova (Contact Author)

Deutsche Bundesbank - Research Centre ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Enrico Perotti

University of Amsterdam ( email )

Spui 21
Amsterdam, 1018 WB
Netherlands

Javier Suarez

Centre for Monetary and Financial Studies (CEMFI) ( email )

Casado del Alisal 5
28014 Madrid
Spain
+34 91 429 0551 (Phone)
+34 91 429 1056 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

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