True Taxpayer Burden of Bank Restructuring
AbstractWe formalize the taxpayer burden implied by various bank restructuring plans. Even assuming minimal frictions, in spirit of Modigliani and Miller (1958), when debt contracts cannot be changed, transfers from the taxpayer (in a Net Present Value sense) are necessary. Debt holders benefit from a lower default probability and a higher recovery given default. Absent government transfers, their gains imply a decrease in equity value. Shareholders will therefore oppose the restructuring unless they receive transfers from taxpayers. The taxpayer burden consists of the NPV of inflows and outflows of cash needed to persuade shareholders (or bank managers) to accept a change in capital structure. The government’s intervention aims at preventing systemic effects from a default of an important bank, and thus targets a default rate. Due to different implied recovery rates given default, the required transfer amounts vary across restructuring plans that achieve the same target default rate. In this regard, asset sales require more transfers than recapitalization or asset guarantees, because asset sales support a higher recovery rate.
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Bibliographic InfoPaper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 662.
Date of creation: 05 Jun 2009
Date of revision: 16 Dec 2010
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Bank restructuring; Too big to fail; Bank subsidy; Crisis management;
Other versions of this item:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
- H12 - Public Economics - - Structure and Scope of Government - - - Crisis Management
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- Jean-Jacques Laffont, 1988. "Fundamentals of Public Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121271, December.
- Augustin Landier & Kenichi Ueda, 2009. "The Economics of Bank Restructuring," IMF Staff Position Notes 2009/12, International Monetary Fund.
- Harald Uhlig, 2009.
"A Model of a Systemic Bank Run,"
2009-006, Becker Friedman Institute for Research In Economics.
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