Optimal Forbearance of Bank Resolution

Abstract

This paper analyzes a regulator's optimal strategic delay of resolving banks when a resolution causes inefficiencies. The regulator observes depositors' withdrawals at the bank level and needs to decide on how many withdrawals to tolerate before intervening to impose a mandatory stay. The regulator then either liquidates the illiquid assets, continues the management of assets at reduced efficiency, or imposes bail-ins. I show, in either case, as the regulator tolerates fewer withdrawals until intervention, depositors endogenously react by preempting the regulator. They run on the bank more often ex ante.

Keywords: Bank resolution, suspension of convertibility, mandatory stay, forbearance, bank run, deposit insurance, deposit freeze, recovery rates, global games

JEL Classification: G28, G21, G33,D8, E6