Presenter: Denis Gromb (HEC Paris)
How do resolution frameworks affect the private restructuring of distressed banks? We model a distressed bank’s shareholders and creditors negotiating its restructuring given asymmetric information about asset quality and externalities onto the government. This yields costly negotiation delays used to signal asset quality. We find that strict bail-in rules increase delays by worsening informational frictions and reducing bargaining surplus. We characterize optimal bail-in rules for the government. We then consider the government’s possible involvement in negotiations. We find that, depending on conditions, this can lead to shorter or longer delays. Notably, the government may find it optimal to commit not to partake in negotiations. Keywords: Bank resolution, bail-out, bail-in, debt restructuring.