Discussion paper
DP19032 Financial Restructuring and Resolution of Banks
How do resolution frameworks affect the private restructuring of distressed banks? We model a bank’s shareholders and creditors negotiating a restructuring, under two frictions: asymmetric information about asset quality, and externalities on the government. High-quality banks signal themselves by delaying the negotiation, which is socially inefficient. Public policies can improve welfare if they reduce the signaling motive or increase the negotiation surplus. Stricter bail-in rules make debt more information-sensitive and increase delays. The bank chooses a capital structure with too little renegotiable debt, giving a new rationale for, e.g., TLAC ratios.
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