Speedy Bankruptcy Procedures and Bank Bailouts

Author Name UEDA Kenichi (University of Tokyo / TCER / CEPR)
Creation Date/NO. December 2019 19-E-108
Research Project Study Group on Corporate Finance and Firm Dynamics
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To reduce the future occurrence of bank bailouts, after the global financial crisis of 2008, the financial stability policies seem to settle into stronger prudential regulations (e.g., capital requirements) and speedier bankruptcy procedures especially for big banks (e.g., living wills). Speedier bankruptcy procedures have also been adopted to help heavily indebted households and corporations in many countries. However, I argue here an opposite consequence. Because of simple and speedy bankruptcy procedures, along with prudential regulations, bank bailouts can be justified in a crisis. This result emerges as an implication of optimal contracts in general equilibrium with an endogenous, competitive banking sector.