Bail-ins and Bail-outs in Bank Resolution
|Speaker:||Lucy White, Boston University|
|Date:||Tuesday 30 January 2018|
|Location:||Pearson teaching room, Building: one|
Recent reforms give regulators broad powers to “bail-in” bank creditors during financial
crises. We analyze equilibrium bail-in policies, showing that such plans often lack credibility.
Discretionary intervention is too weak in bad times because regulators must avoid signaling
negative private information to creditors. Welfare is improved by rules that mandate bailins
based on a public, though coarser, signal. An efficient policy is discretion in good times
and rules in bad times, and is implementable using contingent convertible (co-co) bonds. A
strong commitment to avoid future bail-outs can be counter-productive, making early bail-in
harder and bail-outs more likely.