N°26-16: Strong Wills, Strong Outcomes? Bank Resolvability and Credit Supply

This paper investigates the role of resolvability as a new regulatory constraint for restricting the bank behaviour. Using a regression-discontinuity (RD) design, we exploit the 2019 regulatory shock that made banks with assets below the $250 billion Asset Threshold exempt to the Fed and the FDIC resolution ("living will") requirements. We find that the affected banks experience an increase in their profitability and their shareholder value. They also lend more and at more favourable terms. Bank lending increases especially in less resolvable loans with no covenant restrictions and in countries with poor creditor rights. Overall, bank complexity increases, but with no impact on bank riskiness. Our findings suggest that by enforcing crisis plans, bank regulations inefficiently suppress the credit supply of large banks in the economy.