Optimal Forbearance of Bank Resolution
Corresponding Author
LINDA M. SCHILLING
Linda M. Schilling is at Olin School of Business at Washington University in St. Louis. I thank Harald Uhlig, Mikhail Golosov, Andreas Neuhierl, Toni Ahnert, Philip Bond (editor), Benjamin Brooks, Edouard Challe, Nicolae Garleanu, Zhiguo He, Joonhwi Joo, Michael Koetter, Eugen Kovac, Espen Moen, Raghuram Rajan, Referee 1, Philip Schnabl, Peter Sørensen, Jeremy Stein, Philipp Strack, and Ariel Zetlin-Jones for very insightful comments on the paper. This research was partially supported by a grant of the French National Research Agency (ANR), Investissements d'Avenir (LabEx Ecodec/ANR-11-LABX-0047). This paper developed during a stay at the Becker Friedman Institute for Research in Economics of the University of Chicago in 2017. The support and hospitality of this institution are gratefully acknowledged. I have read The Journal of Finance disclosure policy and have no conflicts of interest to disclose.
Correspondence: Linda M. Schilling, Olin School of Business, Washington University in St. Louis, Simon Hall, St. Louis, MO 63130-4899; e-mail: [email protected].
Search for more papers by this authorCorresponding Author
LINDA M. SCHILLING
Linda M. Schilling is at Olin School of Business at Washington University in St. Louis. I thank Harald Uhlig, Mikhail Golosov, Andreas Neuhierl, Toni Ahnert, Philip Bond (editor), Benjamin Brooks, Edouard Challe, Nicolae Garleanu, Zhiguo He, Joonhwi Joo, Michael Koetter, Eugen Kovac, Espen Moen, Raghuram Rajan, Referee 1, Philip Schnabl, Peter Sørensen, Jeremy Stein, Philipp Strack, and Ariel Zetlin-Jones for very insightful comments on the paper. This research was partially supported by a grant of the French National Research Agency (ANR), Investissements d'Avenir (LabEx Ecodec/ANR-11-LABX-0047). This paper developed during a stay at the Becker Friedman Institute for Research in Economics of the University of Chicago in 2017. The support and hospitality of this institution are gratefully acknowledged. I have read The Journal of Finance disclosure policy and have no conflicts of interest to disclose.
Correspondence: Linda M. Schilling, Olin School of Business, Washington University in St. Louis, Simon Hall, St. Louis, MO 63130-4899; e-mail: [email protected].
Search for more papers by this authorABSTRACT
This paper analyzes a regulator's optimal strategic delay of resolving banks when the regulator's announcement of the intervention delay endogenously affects the depositors' run propensity. Given intervention, the regulator either liquidates the remaining illiquid assets (“prompt corrective action”) or continues managing the assets at a reduced skill level (“resolution under receivership”). In either case, I show that if the regulator tolerates fewer withdrawals until intervention, the depositors may react by preempting the regulator: they run on the bank more often ex ante. A policy of never intervening can leave the bank more stable than a conservative intervention policy.
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