In the first episode of the Policy Implications Podcast, we discuss the new research of prof. Aneta Hryckiewicz (jointly with Natalia Kryg and Dimitri Tsomocos) on the bank resolution mechanisms and the best instruments available to policymakers to help banks in distress.
We study the effectiveness of three common bank resolution mechanisms: bailouts, bank sales, and ‘bad banks’. We first apply the financial fragility model of Goodhart et al. (2005, 2006a) to analyze the impact of these resolution mechanisms on bank behavior. We then use a novel bank-level database on 39 countries that used these resolution mechanisms during 1992-2017 and analyze the relationship between the mechanisms applied and subsequent bank performance. We find that the effectiveness of resolution mechanisms depends crucially on the timing and severity of crises. While mergers can deliver good results at the beginning of a crisis, this is less likely at later stages of a crisis. In the event of severe crises, mechanisms aimed at restructuring bank balance sheets are most likely to deliver positive results. We find no support for bank bailouts as an optimal strategy. A calibration exercise shows that the effectiveness of resolution mechanisms to mitigate systemic risk declines with the severity of crises.
Policy Implications Podcast is a show where we discuss the most recent research in economics and finance. During each episode, we talk about the main ideas of the research and what we can learn from it paying special attention to how its results can be used by the policymakers. The show is hosted by dr Olha Zadorozhna and is part of the Kozminski Insights series.
