Optimal Forbearance of Bank Resolution

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