The Economics of Bank Bankruptcy Law

Marinč, Matej; Vlahu, Razvan

doi:10.1007/978-3-642-21807-1

Cited by 25 publications

(30 citation statements)

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“…Because the nancial holdings and non-bank nancial institutions in question exhibit similar characteristics to those described by Marinc and Vlahu (2011), an application of these corporate insolvency procedures might cause severe disruptions. 9 When these institutions were e ectively exempted from the special bank resolution regime, the default corporate law was apparently inappropriate to e ciently resolve their insolvency.…”

Section: Bank Resolution Regimementioning

confidence: 92%

“…The act is designed to allow the timely intervention and resolution of insolvent banks while limiting moral hazard and potentially detrimental e ects to liquidity, sound banks, and the real economy. To achieve the goal of a least cost (and least adverse e ects) resolution, the special resolution regime deviates signi cantly from the regular, judicial insolvency procedure with regard to insolvency triggers and initiation conditions, resolution instruments, nancing, and possibilities for appeal and review (Bliss and Kaufman, 2006;Marinc and Vlahu, 2011). The FDIC has powers to promptly intervene upon certain initiating conditions, such as critical undercapitalization, without having to wait for the ling of a default event or for a court decision.…”

Section: Bank Resolution Regimementioning

confidence: 99%

“…9 When these institutions were e ectively exempted from the special bank resolution regime, the default corporate law was apparently inappropriate to e ciently resolve their insolvency. Hence, this situation was considered to be a de ciency in the resolution regime for nancial rms, which might have protected these institutions from actual failure by making bailout the only available choice (FDIC, 2011;Marinc and Vlahu, 2011).…”

Section: Bank Resolution Regimementioning

confidence: 99%

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Wishful thinking or effective threat? Tightening bank resolution regimes and bank risk-taking

Ignatowski

Korte

2014

Journal of Financial Stability

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may AbstractWe propose a framework for testing the e ects of changes in bank resolution regimes on bank behavior. By exploiting the di erential relevance of recent changes in U.S. bank resolution (i.e., the introduction of the Orderly Liquidation Authority, OLA) for di erent types of banks, we are able to simulate a quasi-natural experiment using a di erence-in-di erence framework. We nd that banks that are more a ected by the introduction of the OLA (1) signi cantly decrease their overall risk-taking and (2) shift their business model and loan origination towards lower risk, indicating the general e ectiveness of the regime change. This e ect, however, does (3) not hold for the largest and most systemically important banks. Hence, the introduction of the OLA in the U.S. alone does not appear to have solved the too-big-to-fail problem and might need to be complemented with other measures to limit nancial institutions' risk-taking. Non-technical summary Bank regulators and legislators have discussed and brought into force signi cant changes to bank resolution regimes in an e ort to prevent future crises. However, can this really induce more prudent bank behavior? Economic theory indeed suggests that credible improvements in resolution regimes can increase overall bank discipline. When bank regulators, i.e., the authorities competent for resolution decisions, do not have access to a special bank resolution regime and appropriate resolution funds, they might incur large liquidity costs -such as temporary disruptions in lending that would add downward risks to the real economy -if they have to resolve a failed bank. Despite the long run bene ts of discipline, competent authorities might hence prefer bailouts or forbearance over straightforward resolution. Improvements in resolution regimes, however, that (a) legally empower the authorities to execute bank resolution faster and more e ciently while preserving more liquidity, and (b) endow the authorities with su cient nancial resources to resolve banks, make resolution a more likely choice. Consequently, to the extent that an improvement in bank resolution regimes is credible and enforceable, implicit bailout guarantees might cease, and banks might change their behavior towards less risk-taking.Building on this theoretical background, we de ne our hypothesis that banks a ected by a tightening in resolution regimes alter their behavior towards less risk-taking and safer busi...

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Section: Bank Resolution Regimementioning

confidence: 92%

Section: Bank Resolution Regimementioning

confidence: 99%

Section: Bank Resolution Regimementioning

confidence: 99%

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Wishful thinking or effective threat? Tightening bank resolution regimes and bank risk-taking

Ignatowski

Korte

2014

Journal of Financial Stability

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“…The suboptimal outcomes are most visible in distorted credit allocation and monitoring decisions in the absence of a strict insolvency resolution regime. Since their failure has strong negative externalities, banks might take excessive risks anticipating a bailout if their strategy goes wrong (Marin and Vlahu, 2011).…”

Section: Non-technical Summarymentioning

confidence: 99%

“…For nancial intermediaries, the tendency towards excessive risk-taking is even amplied when their failures are associated with strong negative externalities which 3 give banks bargaining power over their treatment in a failure situation. An individual bank might thus not have to fear bankcruptcy but can anticipate a bailout due to implicit or explicit government guarantees (Marin and Vlahu, 2011). This can lead not only to intentional excessive risk-taking and unsound blow-up of balance sheets, but also to insucient screening and monitoring of borrowers (Dell'Ariccia and Marquez, 2006).…”

Section: How Distorted Incentives Around Bank Insolvency Can Harm Thementioning

confidence: 99%

Catharsis—The real effects of bank insolvency and resolution

Korte

2015

Journal of Financial Stability

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implemented by relating bank assets that have been resolved after undercutting a specic capital ratio to all bank assets of banks that have undercut this ratio. Hence, the indicator essentially captures the idea of how rules-based failed banks are resolved. In addition,we construct a panel of more than 2 million rm-year observations containing economic performance data of non-nancial rms. As the relation between real economic growth and the nancial system might be prone to reverse causality and endogeneity issues, we employ an identication framework consisting of several econometric techniques which helps us establish causality.Our results conrm the hypothesis of a positive`catharsis eect' and yield three important ndings. First, we nd a comparably stronger implementation of a hypothetical positive capital closure rule to have a positive and statistically as well as economically signicant eect on individual rm growth. To underline the causality of this relation, we show that the eect is particularly pronounced for rms that are structurally more dependent on bank nancing. With regard to economic signicance, our results suggest that the`catharsis eect' can cause a dierence of roughly 0.4 to 0.6 percentage points in rms' growth rates. Second, investigating the transmission channels of the`catharsis eect', we nd that it essentially works through beneting better quality rms (`quality channel') and reallocating credit towards rms that need it most (`quantity channel').Third, additional analyses suggest that the`catharsis eect' works best under specic economic conditions, for example in open banking systems that provide high access to international nance and hence mitigate potential negative consequences of insolvent bank liquidation. All our ndings are robust to various specications.Taken together, our results strongly underline the signicance of bank insolvency and resolution for the real economy. AbstractIn general, banks play a growth-enhancing role for the real economy. However, distorted incentives for banks, depositors, and regulators in connection with bank insolvency may corrupt banks' credit allocation and monitoring decisions, leading to suboptimal real economic outcomes. A rules-based prompt resolution regime for insolvent banks may reestablish the incentive system and provide for economically superior credit allocation and monitoring. We test the hypothesis that regulatory insolvency has a cathartic eect using a large rm-level dataset and proposing a new indicator to measure the strength of catharsis. Employing an instrumental variable setup and an interaction approach, we try to overcome concerns about causality and potential endogeneity which are usually inherent to research into the real economic implications of bank regulation. We nd a comparably stronger implementation of a hypothetical positive capital closure rule to have a positive and statistically as well as economically signicant eect on individual rm growth -particularly for rms that are structurally more dependent on bank nancing. Our ndings ...

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Should competition policy in banking be amended during crises? Lessons from the EU

Hasan¹,

Marinč²

2013

Eur J Law Econ

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This article investigates the nexus of competition and stability in European banking. It analyzes the European legal framework for competition policy in banking and several cases that pertain to anti-cartel policy, merger policy, and state-aid control. It discusses whether and how competition policy should be amended in order to preserve the stability of the banking system during crises. The article argues for increased cooperation between prudential regulators and competition authorities, as well as an enhanced framework for bank regulation, supervision, and resolution that could mitigate the need to change competition policy in crisis times.

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The Economics of Bank Bankruptcy Law

Cited by 25 publications

References 0 publications

Wishful thinking or effective threat? Tightening bank resolution regimes and bank risk-taking

Wishful thinking or effective threat? Tightening bank resolution regimes and bank risk-taking

Catharsis—The real effects of bank insolvency and resolution

Should competition policy in banking be amended during crises? Lessons from the EU

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