Andrea Tarelli – Università Cattolica (Milano)

Bail-in vs bail-out: Bank resolution and liability structure
(joint work with Luca Leanza and Alessandro Sbuelz)

February 18, 2020 – 12.00 

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.