Bank Resolution, Risk-Taking and Claimholders' Bargaining Power
49 Pages Posted: 11 Jan 2019 Last revised: 4 Sep 2020
Date Written: January 9, 2019
We study the influence of unsecured debt (subdebt) and of bail-in debt on banks' risk-taking in a contingent claim model, while considering the bargaining between stockholders and debtholders. We show that replacing stock with subdebt: (1) leads to fewer risk-shifting events, but generates a higher level of risk when stockholders have strong bargaining power, and (2) does not affect asset risk when side-payments are possible. Further, severe regulatory corrective measures might have adverse effects on risk-shifting. Finally, in a bank with bail-inable debt, an increase in debt write-down increases the magnitude, yet decreases the likelihood, of risk-shifting events.
Keywords: Risk-taking, asset risk, financial institutions, stress test, leverage, bargaining, bail-in debt.
JEL Classification: G20, G21, C78
Suggested Citation: Suggested Citation