How do regulators design bank capital requirements when banks can misreport the value of their assets? We show that the answer depends critically on the existence of secondary markets for bank assets. Without secondary markets, capital requirements based on banks' reporting are more socially...

We model the failed bank resolution process as a repeated game between a utility-maximizing government resolution authority (RA) and a profit-maximizing banking industry. Limits to resolution technology and political/economic pressure create incentives for the RA to bail out failed complex...