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Cleaning up the refuse from a financial crisis: the case for a resolution management corporation

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  • James B. Thomson

Abstract

Systemic banking and financial crises invariably result in the transfer of a large volume of distressed financial assets into the hands of the government, which must later dispose of them. The fiscal and economic costs of the crisis and the speed of recovery depend on how effectively the government’s salvage operations can re-privatize these assets. To maximize the operations’ effectiveness, I propose that the government create a temporary resolution management corporation. Drawing on Kane’s (1990) asset-salvage principles, as well as the U.S. experience with special-purpose entities for managing and disposing of assets stripped from distressed financial firms’ balance sheets, I propose a design for such a corporation.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 1015.

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Date of creation: 2010
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Handle: RePEc:fip:fedcwp:1015

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Keywords: Financial crises;

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  1. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "The Aftermath of Financial Crises," NBER Working Papers 14656, National Bureau of Economic Research, Inc.
  2. Gorton, Gary & Huang, Lixin, 2006. "Bank panics and the endogeneity of central banking," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1613-1629, October.
  3. Ramon P. DeGennaro & James B. Thomson, 1992. "Capital forbearance and thrifts: an ex post examination of regulatory gambling," Working Paper 9209, Federal Reserve Bank of Cleveland.
  4. 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.
  5. Joseph Haubrich & James Thomson & O. Emre Ergungor, 2007. "Central banks and crisis management," Annual Report, Federal Reserve Bank of Cleveland, pages 7-20.
  6. Charles Kahn & Andrew Winton, 2004. "Moral Hazard and Optimal Subsidiary Structure for Financial Institutions," Journal of Finance, American Finance Association, vol. 59(6), pages 2531-2575, December.
  7. Christopher J. Pike & James B. Thomson, 1991. "The RTC and the escalating costs of the thrift insurance mess," Economic Commentary, Federal Reserve Bank of Cleveland, issue May.
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