Optimal Forbearance of Bank Resolution

ABSTRACT This paper analyzes a regulator's optimal strategic delay of resolving banks when the announcement intervention endogenously affects depositors' run propensity. Given intervention, regulator either liquidates remaining illiquid assets (“prompt corrective action”) or continues managing at reduced skill level (“resolution under receivership”). In case, I show that if tolerates fewer withdrawals until depositors may react by preempting regulator: they on bank more often ex ante. A policy never intervening can leave stable than conservative policy.