Bank Resolution, Risk-Taking and Claimholders’ Bargaining Power

Heller, Yuval and Peleg Lazar, Sharon and Raviv, Alon (2019): Bank Resolution, Risk-Taking and Claimholders’ Bargaining Power.

Abstract

We analyze the influence of unsecured debt (subdebt) on risk-shifting in banks whose assets are risky debt claims. We assume that the stockholders and subdebt-holders jointly decide on risk-shifting. We show that replacing part of the stock with subdebt: (1) leads to fewer risk-shifting events, but can lead to higher levels of risk, depending on the relative bargaining power, (2) does not change the level of risk-shifting when side payments are possible, and (3) may yield the surprising result that risk-shifting increases with tighter regulatory control.

• Item Type: MPRA Paper
• Language: English
• Keywords: Risk-taking, asset risk, financial institutions, stress test, leverage, bargaining
• Subjects: C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C78 - Bargaining Theory ; Matching Theory; G - Financial Economics > G2 - Financial Institutions and Services > G20 - General; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

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