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Failed bank resolution and the collateral crunch: the advantages of adopting transferable puts

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  • Eric S. Rosengren
  • Katerina Simons

Abstract

Current methods of failed bank resolution are unnecessarily expensive for taxpayers and impose substantial costs on borrowers at failed banks. This situation is due to distorted incentives imbedded in the standard contract between the government and acquirers of failed banks, which result in more loan foreclosures than if the loan were held by a well-capitalized bank. This paper proposes a modification to the standard contract in the form of a transferable put, which would introduce market-based incentives to the disposition of failed bank assets.

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File URL: http://www.bostonfed.org/economic/wp/wp1992/wp92_5.pdf
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Bibliographic Info

Paper provided by Federal Reserve Bank of Boston in its series Working Papers with number 92-5.

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Date of creation: 1992
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Publication status: Published in AREUEA 22, no. 1 (Spring 1994): 135-47.
Handle: RePEc:fip:fedbwp:92-5

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Keywords: Bank failures;

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References

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  1. Chan, Yuk-Shee & Kanatas, George, 1985. "Asymmetric Valuations and the Role of Collateral in Loan Agreements," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(1), pages 84-95, February.
  2. Sally M. Davies & Douglas A. McManus, 1991. "The effects of closure policies on bank risk-taking," Finance and Economics Discussion Series 158, Board of Governors of the Federal Reserve System (U.S.).
  3. Flannery, Mark J., 1989. "Capital regulation and insured banks choice of individual loan default risks," Journal of Monetary Economics, Elsevier, vol. 24(2), pages 235-258, September.
  4. Davies, Sally M. & McManus, Douglas A., 1991. "The effects of closure policies on bank risk-taking," Journal of Banking & Finance, Elsevier, vol. 15(4-5), pages 917-938, September.
  5. Furlong, Frederick T. & Keeley, Michael C., 1989. "Capital regulation and bank risk-taking: A note," Journal of Banking & Finance, Elsevier, vol. 13(6), pages 883-891, December.
  6. Frederick T. Furlong & Michael C. Keeley, 1987. "Bank capital regulation and asset risk," Economic Review, Federal Reserve Bank of San Francisco, issue Spr, pages 20-40.
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Cited by:
  1. Peter Nigro & Kevin Jacques, 2000. "Financial Turmoil, Failed Bank Acquisitions, and Bank Business Lending Behavior," Journal of Financial Services Research, Springer, vol. 17(2), pages 149-164, August.
  2. Paul Hoffman & Anthony M. Santomero, 1998. "Problem Bank Resolution: Evaluating the Options," Center for Financial Institutions Working Papers 98-05, Wharton School Center for Financial Institutions, University of Pennsylvania.
  3. Geoffrey M. B. Tootell, 1996. "Can studies of application denials and mortgage defaults uncover taste-based discrimination?," Working Papers 96-10, Federal Reserve Bank of Boston.
  4. Mark M. Spiegel, 2001. "The disposition of failed bank assets: put guarantees or loss-sharing arrangements?," Working Paper Series 2001-12, Federal Reserve Bank of San Francisco.
  5. Mark M. Spiegel, 2002. "The disposition of failed Japanese bank assets: lessons from the U.S. savings and loan crisis," Economic Review, Federal Reserve Bank of San Francisco, pages 1-15.

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