A Coasean Approach to Bank Resolution Policy in the Eurozone

16 Pages Posted: 9 Dec 2012

See all articles by Gregory Connor

Gregory Connor

National University of Ireland, Maynooth (NUI Maynooth) - Department of Economics

Brian G. O'Kelly

Dublin City University

Date Written: December 7, 2012

Abstract

The Eurozone needs a bank resolution regime that can work across seventeen independent nations of diverse sizes with varying levels of financial development, limited fiscal co-responsibility, and with systemic instability induced by quick and low-cost deposit transfers across borders. We advocate a Coasean approach to bank resolution policy in the Eurozone, which emphasises clear and consistent contracts and makes explicit the public ownership of the externality costs of bank distress. A variety of resolution mechanisms are compared including bank debt holder bail-in, prompt corrective action, and contingent convertible bonds. We argue that the “dilute-in” of bank debt holders via contingent convertibility provides a clearer and simpler Coasean bargain for the Eurozone than the more conventional alternatives of debt holder bail-in or prompt corrective action.

Keywords: bank resolution, Eurozone, bank distress

JEL Classification: G18, G21, G33, L51

Suggested Citation

Connor, Gregory and O'Kelly, Brian G., A Coasean Approach to Bank Resolution Policy in the Eurozone (December 7, 2012). Available at SSRN: https://ssrn.com/abstract=2186610 or http://dx.doi.org/10.2139/ssrn.2186610

Gregory Connor (Contact Author)

National University of Ireland, Maynooth (NUI Maynooth) - Department of Economics ( email )

County Kildare
Ireland

Brian G. O'Kelly

Dublin City University ( email )

Ireland 9
Dublin 9, leinster 9
Ireland

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