Walking Wounded Or Living Dead? Making Banks Foreclose Bad Loans
AbstractDue to limited liability, banks that are essentially insolvent may have incentives to roll over bad loans as a gamble for resurrection, even though it is socially inefficient to do so. This paper considers the problem of making such banks remove and/or foreclose bad loans, when the proportion of loans on a bank's balance sheet that has gone bad is private information. The private information implies that many plausible schemes are likely to generate widfall gains for bank equity holders, which is undesirable. We propose a scheme with voluntary participation, under which banks (i) reveal the proportion of bad loans on their balance sheet, (ii) remove or foreclose them, and (iii) bank equity holders are no better off than they would be in the absence of the scheme, that is, the scheme produces no windfall gains for bank equity holders.
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 InfoPaper provided by CEMFI in its series Working Papers with number wp2010_1003.
Date of creation: Mar 2010
Date of revision:
Other versions of this item:
- Max Bruche & Gerard Llobet, 2011. "Walking Wounded or Living Dead? Making Banks Foreclose Bad Loans," FMG Discussion Papers dp675, Financial Markets Group.
- NEP-ALL-2010-07-10 (All new papers)
- NEP-BAN-2010-07-10 (Banking)
- NEP-CTA-2010-07-10 (Contract Theory & Applications)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Sudipto BHATTACHARYA & Kjell G. NYBORG, 2010.
"Bank Bailout Menus,"
Swiss Finance Institute Research Paper Series
10-24, Swiss Finance Institute.
- Bhattacharya, Sudipto & Nyborg, Kjell G, 2010. "Bank Bailout Menus," CEPR Discussion Papers 7906, C.E.P.R. Discussion Papers.
- Sudipto Bhattacharya & Kjell G. Nyborg, 2011. "Bank Bailout Menus," FMG Discussion Papers dp668, Financial Markets Group.
- Sudipto Bhattacharya & Kjell G. Nyborg, 2011. "Bank Bailout Menus," FMG Discussion Papers dp676, Financial Markets Group.
- Englund, Peter, 1999. "The Swedish Banking Crisis: Roots and Consequences," Oxford Review of Economic Policy, Oxford University Press, vol. 15(3), pages 80-97, Autumn.
- Joe Peek & Eric S. Rosengren, 2003.
"Unnatural Selection: Perverse Incentives and the Misallocation of Credit in Japan,"
NBER Working Papers
9643, National Bureau of Economic Research, Inc.
- Joe Peek & Eric S. Rosengren, 2005. "Unnatural Selection: Perverse Incentives and the Misallocation of Credit in Japan," American Economic Review, American Economic Association, vol. 95(4), pages 1144-1166, September.
- Lawrence M. Ausubel & Peter Cramton, 2008. "A Troubled Asset Reverse Auction," Papers of Peter Cramton 08tara, University of Maryland, Department of Economics - Peter Cramton, revised 2008.
- Jenny Corbett & Janet Mitchell, 2000.
"Banking Crises and Bank Rescues: The Effect of Reputation,"
William Davidson Institute Working Papers Series
290, William Davidson Institute at the University of Michigan.
- Corbett, Jenny & Mitchell, Janet, 2000. "Banking Crises and Bank Rescues: The Effect of Reputation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(3), pages 474-512, August.
- Jenny Corbett & Janet Mitchell, 2000. "Banking crises and bank rescues: the effect of reputation," Proceedings, Federal Reserve Bank of Cleveland, pages 474-517.
- Gary Gorton & Lixin Huang, 2002.
"Liquidity, Efficiency and Bank Bailouts,"
Center for Financial Institutions Working Papers
02-33, Wharton School Center for Financial Institutions, University of Pennsylvania.
- 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.
- House, Christopher & Masatlioglu, Yusufcan, 2010.
"Managing Markets for Toxic Assets,"
24590, University Library of Munich, Germany.
- Jullien, Bruno, 1997.
"Participation Constraints in Adverse Selection Models,"
IDEI Working Papers
67, Institut d'Économie Industrielle (IDEI), Toulouse.
- Jullien, Bruno, 2000. "Participation Constraints in Adverse Selection Models," Journal of Economic Theory, Elsevier, vol. 93(1), pages 1-47, July.
- Sudheer Chava & Michael R. Roberts, 2008. "How Does Financing Impact Investment? The Role of Debt Covenants," Journal of Finance, American Finance Association, vol. 63(5), pages 2085-2121, October.
- Ricardo J. Caballero & Takeo Hoshi & Anil K. Kashyap, 2006.
"Zombie Lending and Depressed Restructuring in Japan,"
NBER Working Papers
12129, National Bureau of Economic Research, Inc.
- Ricardo J. Caballero & Takeo Hoshi & Anil K. Kashyap, 2008. "Zombie Lending and Depressed Restructuring in Japan," American Economic Review, American Economic Association, vol. 98(5), pages 1943-77, December.
- Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, January.
- Maggi G. & Rodriguez-Clare A., 1995. "On Countervailing Incentives," Journal of Economic Theory, Elsevier, vol. 66(1), pages 238-263, June.
- Sekine, Toshitaka & Kobayashi, Keiichiro & Saita, Yumi, 2003. "Forbearance Lending: The Case of Japanese Firms," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 21(2), pages 69-92, August.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Araceli Requerey).
If references are entirely missing, you can add them using this form.