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Optimal Design of Bank Bailouts: The Case of Prompt Corrective Action

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  • J.-P. Niinimäki

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    (Turku School of Economics)

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    Abstract

    The paper investigates the optimal design of bank bailouts in economies where banks can hide loan losses, and focuses on banking regulation via two Prompt Corrective Action instruments: prohibition of dividends and early closure policy. The first has a mitigating effort on moral hazard and regulator’s costs but the second instrument has a damaging impact. As to bad debts and the cleaning of banks’ balance sheets, asset insurance for the bank’s loan portfolio, bank capital and prohibition of dividends motivate banks to disclose loan losses.

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    File URL: http://taloustieteellinenyhdistys.fi/images/stories/fep/fep12012/fep12012_niinimaki.pdf
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    Bibliographic Info

    Article provided by Finnish Economic Association in its journal Finnish Economic Papers.

    Volume (Year): 25 (2012)
    Issue (Month): 1 (Spring)
    Pages: 1-19

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    Handle: RePEc:fep:journl:v:25:y:2012:i:1:p:1-19

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    9. Philippe Aghion, Patrick Bolton & Steven Fries, 1999. "Optimal Design of Bank Bailouts: The Case of Transition Economies," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 155(1), pages 51-, March.
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