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- Title
Liquidation, Bailout, and Bail-In: Insolvency Resolution Mechanisms and Bank Lending.
- Authors
Lambrecht, Bart M.; Tse, Alex S. L.
- 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.
- Subjects
CORPORATE bankruptcy; BANK loans; LIQUIDATION; FINANCIAL bailouts; RISK aversion; FINANCIAL crises; ASSET sales &; prices; MARKET value
- Publication
Journal of Financial & Quantitative Analysis, 2023, Vol 58, Issue 1, p175
- ISSN
0022-1090
- Publication type
Article
- DOI
10.1017/S0022109022000813