Let the Worst One Fail: A Credible Solution to the Too-Big-To-Fail Conundrum / Thomas Philippon, Olivier Wang.

Format:

Book

Author/Creator:

Philippon, Thomas.

Contributor:

National Bureau of Economic Research.

Wang, Olivier.

Series:

Working Paper Series (National Bureau of Economic Research) no. w29560.

NBER working paper series no. w29560

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2021.

Summary:

We study time-consistent bank resolution mechanisms. When interventions are ex post efficient, a government cannot commit not to inject capital into the banking system. Contrary to common wisdom, we show that the government may still avoid moral hazard and implement the first best allocation by using the distribution of bailouts across banks to provide ex ante incentives. In particular, we analyze properties of credible tournament mechanisms that provide support to the best performing banks and resolve the worst performing ones, including through mergers. Our mechanism continues to perform well if banks are partially substitutable, and if they are heterogeneous in their size, interconnections, and thus systemic risk, as long as bailout funds can be targeted to particular banks.

Notes:

Print version record

December 2021.