Quantifying the Social Benefit of Bail-In Measures using Option-Pricing Techniques

The paper considers a simple continuous-time model of the banking firm in which the social benefit of bail-in measures such as contingent convertibles is approximated as the resulting reduction in the fair contribution to a... [ view full abstract ]

The paper considers a simple continuous-time model of the banking firm in which the social benefit of bail-in measures such as contingent convertibles is approximated as the resulting reduction in the fair contribution to a resolution fund.The framework assumes that the assets of the financial institution follow a geometric Brownian motion and that the non-equity liabilities, including insured deposits, uncovered bonds, and contingent convertibles arrive at a constant rate with exponentially distributed maturity or lifetime.