If financial supervisors face high costs over intervening in failing banks, systemic problems can emerge, a working paper published by the Deutsche Bundesbank finds.

In Bank capital forbearance and serial gambling, Natalya Martynova, Enrico Perotti and Javier Suarez argue that political and fiscal costs may undermine supervisors’ commitment to intervene.

“When supervisors have lower credibility, banks’ incentives to voluntary recapitalise are lower and supervisors may end up intervening more,”