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Bank equity stakes in borrowing firms and financial distress

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Author Info
Mitchell Berlin
Kose John
Anthony Saunders

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Abstract

The authors derive optimal financial claim for a bank when the borrowing firm's uninformed stakeholders depend on the bank to establish whether the firm is distressed and whether concessions by stakeholders are necessary. The bank's financial claim is designed to ensure that it cannot collude with a healthy firm's owners to seek unnecessary concessions or to collude with a distressed firm's owners to claim that the firm is healthy. To prove that a request for concessions has not come from a healthy firm/bank coalition, the bank must hold either a very small or a very large equity stake when the firm enters distress. To prove that a distressed firm and the bank have not colluded to claim that the firm is healthy, the bank may need to hold equity under routine financial conditions.

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File URL: http://www.philadelphiafed.org/research-and-data/publications/working-papers/1996/wp96-1.pdf
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Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 96-1.

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Date of creation: 1995
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Handle: RePEc:fip:fedpwp:96-1

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Related research
Keywords: Bank loans ; Bank investments ; Investments;

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  1. Emilio Barucci & Fabrizio Mattesini, 2008. "Bank shareholding and lending: complementarity or substitution? Some evidence from a panel of large Italian firms!," CEIS Research Paper 118, Tor Vergata University, CEIS, revised 14 Jul 2008. [Downloadable!]
    Other versions:
  2. Larry D. Wall & Alan K. Reichert & Hsin-Yu Liang, 2008. "The final frontier : the integration of banking and commerce. Part 1, the likely outcome of eliminating the barrier," Economic Review, Federal Reserve Bank of Atlanta. [Downloadable!]
  3. Elena Zoido, 1998. "Un estudio de las participaciones accionariales de los bancos en las empresas españolas," Investigaciones Economicas, Fundación SEPI, vol. 22(3), pages 427-467, September. [Downloadable!]
  4. John Krainer, 2000. "The separation of banking and commerce," Economic Review, Federal Reserve Bank of San Francisco, pages 15-24. [Downloadable!]
    Other versions:
  5. Margarita Samartín, 2004. "Algunos Temas Relevantes En La Teoría Bancaria," Documentos de Trabajo de Economía de la Empresa db040403, Universidad Carlos III, Departamento de Economía de la Empresa. [Downloadable!]
  6. María José Casasola & Josep A. Tribó, 2004. "Banks As Blockholders," Business Economics Working Papers wb040101, Universidad Carlos III, Departamento de Economía de la Empresa. [Downloadable!]
  7. Mitchell Berlin, 2000. "Why don't banks take stock?," Business Review, Federal Reserve Bank of Philadelphia, issue May, pages 3-15. [Downloadable!]
  8. Andrew Winton, 1996. "Monitored finance, liquidity, and institutional investment choice," Working Paper 9616, Federal Reserve Bank of Cleveland. [Downloadable!]
  9. Philippe Frouté, 2007. "Theoretical foundation for a debtor friendly bankruptcy law in favour of creditors," European Journal of Law and Economics, Springer, vol. 24(3), pages 201-214, December. [Downloadable!] (restricted)
  10. Mitchell Berlin & Loretta J. Mester, 2000. "Optimal financial contracts for large investors: the role of lender liability," Working Papers 00-1, Federal Reserve Bank of Philadelphia. [Downloadable!]
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  11. Sanjay Banerji & Andrew Chen & Sumon Mazumdar, 2002. "Universal Banking Under Bilateral Information Asymmetry," Journal of Financial Services Research, Springer, vol. 22(3), pages 169-187, December. [Downloadable!] (restricted)
  12. John H. Boyd & Chun Chang & Bruce D. Smith, 1998. "Deposit insurance: a reconsideration," Working Papers 593, Federal Reserve Bank of Minneapolis. [Downloadable!]
    Other versions:
  13. Mitchell Berlin & Loretta J. Mester, 1999. "Financial contracts and the legal treatment of informed investors," Working Papers 99-8, Federal Reserve Bank of Philadelphia. [Downloadable!]
  14. Tobias Miarka & Michael Tröge, 2005. "Do bank-firm relationships reduce bank debt? Evidence from Japan," European Journal of Finance, Taylor and Francis Journals, vol. 11(1), pages 75-92, February. [Downloadable!] (restricted)
  15. João A.C. Santos, 1998. "Banking and commerce: how does the United States compare to other countries?," Economic Review, Federal Reserve Bank of Cleveland, issue Q IV, pages 14-26. [Downloadable!]
  16. Joseph G. Haubrich & João A. C. Santos, 1999. "Banking and commerce: a liquidity approach," Working Paper 9907, Federal Reserve Bank of Cleveland. [Downloadable!]
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  17. John H. Boyd & Chun Chang & Bruce D. Smith, 1998. "Moral hazard under commercial and universal banking," Working Papers 585, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  18. Inderst, Roman & Mueller, Holger M, 2003. "Credit Risk Analysis and Security Design," CEPR Discussion Papers 3686, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  19. Miguel A. Ferreira & Pedro Matos, 2009. "Universal Banks and Corporate Control - Evidence from the Global Syndicated Loan Market," Working Paper Series 1066, European Central Bank. [Downloadable!]
  20. María J. Nieto & Gregorio Serna, 2002. "On The Relationship Between A Banks Equity Holdings And Bank Performance," Business Economics Working Papers wb026322, Universidad Carlos III, Departamento de Economía de la Empresa. [Downloadable!]
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