No. 1212 - Bank resolution and public backstop in an asymmetric banking union
The paper develops a theoretical model to analyse optimal bank resolution and the funding of bail-outs in a banking union. The model focuses on a banking union among countries whose public finances exhibit heterogeneous strength. Moreover, the domestic resolution authorities have better information than the central authority regarding the contagion costs of bail-in.
Owing to the existence of asymmetric information between domestic and central authorities, the decision whether to use the bail-in or the bail-out tool to resolve a bank is best left to the domestic authorities, while the central authority fixes each country's contribution to funding bail-outs. In order to ensure that countries with initially sounder public finances participate in the union, the central authority requires bail-outs of banks in those countries to be shared among all the members of the union. For countries with initially weaker public finances, the funding of their banks' bail-outs is shared among all the members of the union only where a domestic bank failure occurs in conjunction with severe public finance problems.
Full text
-
18 March 2019
YouTube
X - Banca d'Italia
Linkedin
RSS
E-mail Alert
