Chapter 17: Reorganization of Banks (Sections 17.1–17.5) Flashcards
(8 cards)
When a bank becomes insolvent or illiquid, what are the two main resolution paths?
Reorganization: Replace management, restructure debts or assets, and keep operations running.
Closure (Liquidation): Shut the bank down, sell assets, and pay creditors in priority order.
Example: the FDIC’s “purchase and assumption” method; the winding‐up of IndyMac in 2008.
In the Dewatripont–Tirole model, what role do ‘signals’ play in deciding whether to fire the manager or close the bank?
Managers receive two imperfect signals—one on past performance and one on future prospects. If the forward signal is weak but past performance was strong, owners may ‘give the manager a second chance’ rather than close immediately.
Example: A bank chief who navigated the 2008 crisis well might be retained even after a few bad quarters.
According to the Repullo model, why might a regulator versus a deposit insurer have different thresholds for closing a bank?
Central bank: Focuses on liquidity‐run signals; may lend to cover withdrawals up to a limit.
Deposit insurer: Cares about net liquidation losses; will close if expected loss exceeds insured coverage.
Example: During the euro‐area crisis, the ECB’s liquidity support sometimes kept banks open that national insurers would otherwise have liquidated.
What is regulatory forbearance as described in the Mailath–Mester model?
Regulators delay closure—even when banks fail capital tests—because the immediate cost of liquidation can exceed the cost of letting a weak bank keep operating.
Example: In the 1980s U.S. thrift crisis, authorities allowed insolvent savings & loans to operate years past safety thresholds.
Why does forbearance create a moral‐hazard problem?
Banks learn that early signs of trouble won’t trigger closure, so they may take on riskier projects, knowing losses can be deferred or subsidized by regulators.
Example: Some institutions expanded subprime portfolios, banking on lenient regulatory treatment if things soured.
What metric does the Systemic Impact Index (SII) capture in Section 17.5?
The average number of other bank failures triggered by one bank’s collapse, measuring how distress propagates through interbank exposures.
Example: A global bank rated “SIFI” has a high SII—its failure could force multiple counterparties into trouble.
How does the Vulnerability Index (VI) complement the SII?
VI measures how likely a given bank is to fail in response to another institution’s collapse, identifying which banks are most exposed to external shocks.
Example: Smaller regional banks heavily reliant on a few large interbank lines score high on VI when a big player looks shaky.
What real‐world tools have regulators adopted to manage systemic risk beyond SII and VI?
Stress tests: Simulate macro shocks to see which banks falter.
Living wills: Require systemically important banks to draft resolution plans showing how they’d unwind without taxpayer bailouts.
