Bank Resolution and Public Backstop in An Asymmetric Banking Union

68 Pages Posted: 6 Aug 2019

See all articles by Anatoli Segura

Anatoli Segura

Bank of Italy

Sergio Vicente

Queen Mary University of London

Multiple version iconThere are 2 versions of this paper

Date Written: March 18, 2019

Abstract

This paper characterizes the optimal banking union with endogenous participation in a two-country economy in which domestic bank failures may be contemporaneous to sovereign crises, giving rise to risk-sharing motives to mutualize bail-out funding. Raising public funds to conduct bail-outs entails a deadweight loss. Bank bail-ins create disruption costs. The optimal resolution trades-off these costs. Truthfully eliciting information from domestic authorities imposes a domestic co-payment to fund bail-outs. When country asymmetry is large, ensuring the ex-ante participation of the fiscally stronger country requires a reduced contribution by this country, which increases the likelihood of bailing out its failing bank.

Keywords: banking union, bail-in, bail-out, public backstop, mechanism design

JEL Classification: G01, G21, G28

Suggested Citation

Segura, Anatoli and Vicente, Sergio, Bank Resolution and Public Backstop in An Asymmetric Banking Union (March 18, 2019). Bank of Italy Temi di Discussione (Working Paper) No. 1212, March 2019, Available at SSRN: https://ssrn.com/abstract=3432420 or http://dx.doi.org/10.2139/ssrn.3432420

Anatoli Segura (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Sergio Vicente

Queen Mary University of London ( email )

Mile End Road
London, London E1 4NS
United Kingdom

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