Bank Restructuring and Soft Budget Constraints in Financial Transition
AbstractThis paper analyses in a formal model the problem of achieving financial discipline in a transitional economy with bank-intermediated finance. Even if banks have no intrinsic interest in refinancing unprofitable firms, they may still exploit the softness of government. By gambling for government bailouts, banks contribute to softening the budget constraints of enterprises. We show that the poor quality of loan portfolios, the absence of collateral and low bank capitalization are key elements explaining soft budget constraints and repeated bank bailouts in transitional economies. Bank reserves help in hardening budget constraints, but high initial levels of capitalization are necessary to mitigate potential negative effects of a credit crunch for enterprises. We show that the trade-off between hardness and enterprise liquidity is more severe when loan portfolios are of poor quality. A similar trade-off arises if a bank invests in screening or monitoring projects to improve the quality of portfolios. Under certain conditions the government should make capitalization contingent on banks investing in monitoring and screening in order to obtain hard budget constraints rather than to let banks use reserves for such investments. We further show that transfers of all non-performing loans to a separate institution, a hospital agency, is never optimal, whereas partial transfers may serve to harden budget constraints.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Elsevier in its journal Journal of the Japanese and International Economies.
Volume (Year): 9 (1995)
Issue (Month): 4 (December)
Contact details of provider:
Web page: http://www.elsevier.com/locate/inca/622903
Other versions of this item:
- Berglöf, Erik & Roland, Gérard, 1995. "Bank Restructuring and Soft Budget Constraints in Financial Transition," CEPR Discussion Papers 1250, C.E.P.R. Discussion Papers.
- G30 - Financial Economics - - Corporate Finance and Governance - - - General
- P50 - Economic Systems - - Comparative Economic Systems - - - General
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
If references are entirely missing, you can add them using this form.