Optimal Timing of Policy Interventions in Troubled Banks

Presse/Medien

Beschreibung

Regulatory authorities faced with a bank whose underlying solvency is uncertain must make a series of decisions, including how and when to intervene. In a recent paper, we analyse the optimal timing of policy interventions in troubled banks and show that it may sometimes be optimal to delay intervention. The reason is that delaying intervention increases the chance that information arrives that reveals the bank’s true solvency state. At the same time, delaying intervention gives uninsured creditors the opportunity to withdraw, which raises the cost of bailing out insured depositors if the bank is ultimately resolved. The optimal timing of resolution trades off these costs with the option value of making a more efficient resolution decision following the arrival of information. 

Zeitraum1 Mai 2022

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