Liquidation, Bailout, and Bail-In: Insolvency Resolution Mechanisms and Bank Lending

Abstract We present a dynamic, continuous-time model in which risk averse inside equityholders set bank’s lending, payout, and financing policies, the exposure of bank assets to crashes. examine whether bailouts encourage excessive lending taking compared liquidation or bail-ins with debt-to-equity conversion debt write-downs. The effects prevailing insolvency resolution mechanism (IRM) on probability insolvency, loss default, value suggest no single IRM is panacea. show how bailout fund financed through tax dividends resolves without public money distorting insiders’ incentives.