Failed bank takeovers and financial stability |
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| Affiliation: | 1. Investment Company Institute (ICI), 1401 H St. NW, Suite 1200, Washington, DC 20005, USA;2. Paris School of Economics, Centre d’Economie de la Sorbonne, 106-112 Boulevard de l’Hôpital, 75647 Paris cedex 13, France;1. School of Economics and Business Administration, University of Navarra, Edificio Amigos, 31009 Pamplona, Spain;2. BBVA Research, Paseo Castellana 81, 7th Floor, 28046 Madrid, Spain;1. Faculty of Law, Economics and Management of Jendouba, University of Jendouba, Tunisia;2. Faculty of Business and Commerce, Keio University, Japan |
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| Abstract: | Current discussion about the design of bank resolution frameworks suggests that the takeover of a failed bank by an incumbent one has two effects on financial stability. First, the incumbent takeover may boost financial stability by providing bankers with incentives to be solvent so as to profit from their competitors’ failure. Second, the incumbent takeover may spoil financial stability by creating “Systemically Important Financial Institutions”. The innovation of this paper is to capture these two effects in a theoretical model. We show that when incumbent bankers are impatient enough (i.e., they have high discount rates), the second effect prevails over the first one. We discuss the implications of this result for the design of bank resolution policies. |
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| Keywords: | Bank takeovers Financial stability Systemically important financial institutions |
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