Optimal timing of policy interventions in troubled banks

Arbeitspapier

We analyze the problem of a policy authority (PA) that must decide when to resolve a troubled bank whose underlying solvency is uncertain. Delaying resolution increases the chance that information arrives that reveals the bank's true solvency state. However, delaying resolution also gives uninsured creditors the opportunity to withdraw, which raises the cost of bailing out insured depositors. The optimal resolution date trades off these costs with the option value of making a more efficient resolution decision following the arrival of information. Providing the bank with liquidity support buys the PA time to wait for information, but increases the PA's losses if the bank is insolvent. The PA may therefore optimally choose to delay the provision of liquidity support in order to minimize its losses.

Object Details

• ISBN: 978-3-95729-878-2
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Deutsche Bundesbank Discussion Paper ; No. 10/2022

Classification and Topics

• Classification: Wirtschaft ; Financial Crises ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages ; Financial Institutions and Services: Government Policy and Regulation
• Subject: Bank Resolution ; Lender of Last Resort ; Banking Crises

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): König, Philipp Johann ; Mayer, Paul ; Pothier, David
• Event: Veröffentlichung
• (who): Deutsche Bundesbank
• (where): Frankfurt a. M.
• (when): 2022

Further information

• Handle: http://hdl.handle.net/10419/251607
• Last update: 10.03.2025, 11:43 AM CET