Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/225324
Authors: 
Martynova, Natalya
Perotti, Enrico C.
Suárez, Javier
Year of Publication: 
2020
Series/Report no.: 
Bundesbank Discussion Paper 56/2020
Abstract: 
We analyze the strategic interaction between undercapitalized banks and a supervisor who may intervene by preventive recapitalization. Supervisory forbearance emerges because political and fiscal costs undermine supervisors' commitment to intervene. When supervisors have lower credibility, banks' incentives to voluntary recapitalize are lower and supervisors may end up intervening more. Importantly, when intervention capacity is constrained (e.g. for fiscal reasons), private recapitalization decisions become strategic complements, producing equilibria with extremely high forbearance and high systemic costs. Anticipating forbearance in response to diffuse undercapitalization, banks may ex ante choose more correlated risks, a form of "serial gambling" undermining the supervisory response.
Subjects: 
bank supervision
bank recapitalization
forbearance
JEL: 
G21
G28
ISBN: 
978-3-95729-782-2
Document Type: 
Working Paper

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