Liquidation, bailout, and bail-in: Insolvency resolution mechanisms and managerial risk-taking

Bart Lambrecht (Cambridge Judge Business School - University of Cambridge)

March 5, 2018, 12:30–14:00

Room MF 323

Fédération des Banques Françaises Seminar


We present a continuous-time model in which risk averse managers set a bank's investment, payout, and debt policy, and the exposure of bank assets to economic downturns that follow Poisson arrivals. After a downturn, solvent banks sell assets and repay debt to restore the bank's optimal debt ratio. Banks with too large an exposure become insolvent and undergo liquidation, bailout, or bail-in. Banks are most (least) prone to insolvency under the bailout (liquidation) regime. The bailout (bail-in) regime generates the highest (lowest) loan volume and bank value net of recapitalization costs. Liquidations (bail-ins) create the largest (smallest) loss in default.