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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. 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.
  2. Charles M. Kahn & Andrew Winton, 2002. "Moral hazard and optimal subsidiary structure for financial institutions," Proceedings, Federal Reserve Bank of Chicago, issue May, pages 129-149.
  3. 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 15.
  4. Reinhart, Carmen & Rogoff, Kenneth, 2009. "The Aftermath of Financial Crises," CEPR Discussion Papers 7209, C.E.P.R. Discussion Papers.
  5. Ramon P. DeGennaro & James B. Thomson & Robert A. Eisenbeis & ary, 1993. "Capital forbearance and thrifts: an ex post examination of regulatory gambling," Proceedings, Federal Reserve Bank of Chicago, issue May, pages 406-420, 40.
  6. Gary Gorton & Lixin Huang, 2002. "Bank Panics and the Endogeneity of Central Banking," Center for Financial Institutions Working Papers 02-29, Wharton School Center for Financial Institutions, University of Pennsylvania.
  7. Joseph Haubrich & James Thomson & O. Emre Ergungor, 2007. "Central banks and crisis management," Annual Report, Federal Reserve Bank of Cleveland, pages 7-20.
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