Published : 2014-05-01

Why Closing Failed Banks Helps the Real Economy

Josef Korte



Abstract

It is widely agreed that banks play a growth-enhancing role for the real economy. However, distorted incentives around bank insolvency may corrupt banks’ credit allocation and monitoring – ultimately leading to suboptimal real economic performance. The outcomes of such distorted incentives are suboptimal credit allocation and monitoring – which is felt in the real economy: Not the
projects and firms that need (and deserve) credit most on grounds of economic viability and profitability, but those that have particular risk- or asset-profiles are now favored by incentive-corrupted financial intermediaries. The results strongly advocate putting bank insolvency and resolution regimes center stage in discussions towards reforming bank regulation. In the European context, this calls for particular emphasis on the common resolution framework and the Single Resolution Mechanism as a vital part of the European Banking Union.

Keywords:

Bank insolvency, bank resolution, growth


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Korte, J. (2014). Why Closing Failed Banks Helps the Real Economy . Safe Bank, 55(2), 85–90. Retrieved from https://ojs.bfg.pl/index.php/bb/article/view/377

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