The German bank restructuring act : an economic perspective

The paper explores incentives created by the German Bank Restructuring Act for investors holding assets in systemically important banks (SIBs). Its purpose is to examine consequences that follow for risk choices of SIBs, as well as for Germany's financial system. Applying the analytical model of Stigliz (1990) the study reinforces the view that regulators can induce SIBs to forego risks by curbing promises of systemic support. Adverse consequences result from the fact that the Bank Restructuring Act is affecting different groups of SIB-investors heterogeneously. This leads to macro-effects that bear potentials to offset risk reductions achieved on the micro level.