Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/210868
Authors: 
Martynova, Natalya
Perotti, Enrico C.
Suárez, Javier
Year of Publication: 
2019
Series/Report no.: 
ESRB Working Paper Series 93
Abstract: 
We analyze the strategic interaction between undercapitalized banks and a supervisor who may intervene by preventive recapitalization. Supervisory forbearance emerges because of a commitment problem, reinforced by fiscal costs and constrained capacity. Private incentives to comply are lower when supervisors have lower credibility, especially for highly levered banks. Less credible supervisors (facing higher cost of intervention) end up intervening more banks, yet producing higher forbearance and systemic costs of bank distress. Importantly, when public intervention capacity is constrained, private recapitalization decisions become strategic complements, leading to equilibria with extremely high forbearance and high systemic costs of bank failure.
Subjects: 
bank supervision
bank recapitalization
forbearance
JEL: 
G21
G28
Persistent Identifier of the first edition: 
ISBN: 
978-92-9472-080-1
Document Type: 
Working Paper

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