Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/193557
Authors: 
Mendicino, Caterina
Nikolov, Kalin
Suarez, Javier
Year of Publication: 
2017
Series/Report no.: 
ESRB Working Paper Series 50
Abstract: 
We examine the optimal size and composition of banks' total loss absorbing capacity (TLAC). Optimal size is driven by the trade-off between providing liquidity services through deposits and minimizing deadweight default costs. Optimal composition (equity vs. bail-in debt) is driven by the relative importance of two incentive problems: risk shifting (mitigated by equity) and private benefit taking (mitigated by debt). Our quantitative results suggest that TLAC size in line with current regulation is appropriate. However, an important fraction of it should consist of bail-in debt because such buffer size makes the costs of risk-shifting relatively less important at the margin.
Subjects: 
bail-in debt
loss absorbing capacity
risk shifting
agency problems
bank regulation
JEL: 
G21
G28
G32
Persistent Identifier of the first edition: 
ISBN: 
978-92-95081-93-2
Document Type: 
Working Paper

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