## Bank Resolution Costs, Depositor Preference, and Asset Encumbrance

_IMF Working Papers, July 18, 2013_

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## Bibliographic details
- Authors: Daniel C Hardy
- Published: July 18, 2013
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484354100.001

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### Summary
- Depositor preference and collateralization of borrowing may reduce the cost of settling the conflicts among creditors that arises in case of resolution or bankruptcy.
- This net benefit, which may be capitalized into the value of the bank rather than affect creditors’ expected returns, should result in lower overall funding costs and thus a lower probability of distress despite increasing encumbrance of the bank’s balance sheet.
- The benefit is maximized when resolution is initiated early enough for preferred depositors to remain fully protected.

### Mechanism and Key Findings
- Depositor preference and collateralization can lower conflict (bankruptcy/resolution) costs among creditors.
- Lower conflict costs can be capitalized into the bank’s value rather than producing higher expected returns for creditors.
- Capitalization of the net benefit leads to:
  - Lower overall funding costs for the bank.
  - A lower probability of distress for the bank.
- Asset encumbrance (through collateralization) increases the encumbrance of the bank’s balance sheet, but the net effect can still be beneficial because of reduced resolution costs.
- The timing of resolution matters: the benefit is maximized when resolution is initiated early enough for preferred depositors to remain fully protected.

### Policy Implications and Considerations
- Designing depositor preference regimes and collateralization rules can influence banks’ funding costs and distress probabilities via effects on resolution costs.
- Ensuring that resolution is initiated sufficiently early to protect preferred depositors can maximize the stabilizing benefits of depositor preference.
- Policymakers should weigh the trade-off between increased asset encumbrance and reduced creditor conflict costs when assessing bank resolution frameworks.

### Publication and Identifiers
- By Daniel C Hardy
- July 18, 2013
- IMF Working Papers
- Pages: 30
- Volume: 2013
- Issue: 172
- Series: Working Paper No. 2013/172
- DOI: https://doi.org/10.5089/9781484354100.001
- Stock No: WPIEA2013172
- ISBN: 9781484354100
- ISSN: 1018-5941

*Source: IMF Working Paper "Bank Resolution Costs, Depositor Preference, and Asset Encumbrance" by Daniel C Hardy, July 18, 2013.*

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/bank-resolution-costs-depositor-preference-and-asset-encumbrance-40799_