Financial Restructuring and Resolution of Banks

Jean-Edouard Colliard, Denis Gromb (in memoriam)  , - Oct 08, 2020

Working Paper No.   00065-00

How do resolution frameworks affect the private restructuring of distressed banks? We model a distressed bank's shareholders and creditors negotiating a restructuring given asymmetric information about asset quality and externalities onto the government. This yields negotiation delays used to signal asset quality. we nd that strict bail-in rules increase delays by worsening informational frictions and reducing bargaining surplus. We characterize optimal bail-in rules for the government. We then consider the government's possible involvement in negotiations. We nd this can lead to shorter or longer delays. Notably, the government may gin from committing not to partake in negotiations.


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Financial Restructuring and Resolution of Banks

00065-01