Debt overhang and bank bailouts
AbstractWhen a bank is deemed 'too big to fail' by regulators, it may be tempted to buy risky assets. This paper analyses bank bailouts involving the purchases of toxic assets, preferred stock and common stock when the government wants to encourage efficient lending. It finds that preferred stock recapitalisations are the least efficient in correcting debt overhang problems from both an ex post and ex ante perspective. In contrast, efficient lending and voluntary participation can be best achieved without subsidy by purchasing either toxic assets or common stock. Nevertheless, troubled banks must be subsidised if they will voluntarily participate in any recapitalisation.
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Bibliographic InfoArticle provided by Inderscience Enterprises Ltd in its journal Int. J. of Monetary Economics and Finance.
Volume (Year): 5 (2012)
Issue (Month): 4 ()
Contact details of provider:
Web page: http://www.inderscience.com/browse/index.php?journalID=218
bank bailouts; banking; debt overhang; common stock; capital assistance program; capital purchase program; Emergency Economic Stabilization Act; lending; preferred stock; PPIP; public-private investment partnerships; TARP; too big to fail; toxic assets; efficient lending; voluntary participation; recapitalisation.;
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- Bulow, Jeremy I. & Klemperer, Paul, 2013.
"Market-Based Bank Capital Regulation,"
CEPR Discussion Papers, C.E.P.R. Discussion Papers
9618, C.E.P.R. Discussion Papers.
- Jeremy Bulow & Paul Klemperer, 2013. "Market-Based Bank Capital Regulation," Economics Papers 2013-W12, Economics Group, Nuffield College, University of Oxford.
- Bulow, Jeremy & Klemperer, Paul, 2013. "Market-Based Bank Capital Regulation," Research Papers, Stanford University, Graduate School of Business 2132, Stanford University, Graduate School of Business.
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