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18 Febbraio, 2020 12:00
Sezione di Finanza Quantitativa

Bail-in vs bail-out: Bank resolution and liability structure

Alessandro Sbuelz, Università Cattolica (Milano)
Aula Consiglio
Abstract

What is the joint impact of different resolution regimes and capital requirements on the optimal liability structure of a bank holding insured deposits and issuing non-bailinable debt and bail-inable Tier1-capital debt? We address this novel question and find that: 1) a credible bail-in resolution regime rules out extreme leverage and creates value by postponing default; 2) a positive probability of bail-out destroys credibility with dramatic effects on financial risk-taking, to the point of reversing the classical positive link between optimal leverage and growth prospects; and 3) a strict enforcement of the Basel III CET1 capital requirement strongly mitigates the impact of a non-credible resolution regime.

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