Optimal Forbearance of Bank Resolution

This paper analyzes a regulator's optimal strategic delay of resolving banks when a resolution causes inefficiencies. The regulator observes depositors' withdrawals at the bank level and needs to decide on how many withdrawals to tolerate before intervening to impose a mandatory stay. The regulator then either liquidates the illiquid assets, continues the management of assets at reduced efficiency, or imposes bail-ins. I show, in either case, as the regulator tolerates fewer withdrawals until intervention, depositors endogenously react by preempting the regulator. They run on the bank more often ex ante