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CPP funds allocation : restoring financial stability or minimising risks of non-repayment to taxpayers?

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The U.S. Federal Reserve responded to liquidity shortage through compulsory loan guarantee scheme and bank recapitalisations mainly under Capital Purchase Program (CPP) for commercial banks. The bailout packages provided under CPP seem to be efficient in responding to the liquidity crisis subject to large banks that contributed the most to systemic risk. However, smaller banks that were actually exposed to the mortgage market and non-performing loans were denied the financial aid or received CPP funds of a relatively smaller size. Such CPP funds allocation was efficient from the point of view of taxpayer as the probability of bailout non-repayments was minimised. However, it did not support real estate loan recapitalisations that could become a reason of large welfare loses for the homeowners.

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File URL: ftp://mse.univ-paris1.fr/pub/mse/CES2012/12072.pdf
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Paper provided by Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne in its series Documents de travail du Centre d'Economie de la Sorbonne with number 12072.

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Length: 37 pages
Date of creation: Sep 2012
Date of revision:
Handle: RePEc:mse:cesdoc:12072

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Keywords: Bailouts; bank recapitalisation; CPP funds; systemic risk.;

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