Tse, ASL;
Lambrecht, B;
(2021)
Liquidation, bailout, and bail-in: insolvency resolution mechanisms and bank lending.
Journal of Financial and Quantitative Analysis
(In press).
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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 examine whether bailouts encourage excessive lending and risk-taking compared to liquidation or bail-ins with debt-to-equity conversion or debt write-downs. The effects of the prevailing insolvency resolution mechanism (IRM) on the probability of insolvency, loss in default, and the bank’s value suggest no single IRM is a panacea. We show how a bailout fund financed through a tax on bank dividends resolves bailouts without public money and without distorting insiders’ incentives.
| Type: | Article |
|---|---|
| Title: | Liquidation, bailout, and bail-in: insolvency resolution mechanisms and bank lending |
| Open access status: | An open access version is available from UCL Discovery |
| Publisher version: | https://www.cambridge.org/core/journals/journal-of... |
| Language: | English |
| Additional information: | This version is the author accepted manuscript. For information on re-use, please refer to the publisher’s terms and conditions. |
| Keywords: | liquidation, bailout, bail-in, asset sale, agency |
| UCL classification: | UCL UCL > Provost and Vice Provost Offices > UCL BEAMS UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Maths and Physical Sciences UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Maths and Physical Sciences > Dept of Mathematics |
| URI: | https://discovery-pp.ucl.ac.uk/id/eprint/10137470 |
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