IDEAS home Printed from https://ideas.repec.org/a/eee/jfinin/v56y2023ics1042957323000414.html
   My bibliography  Save this article

Bank restructuring under asymmetric information: The role of bad loan sales

Author

Listed:
  • Segura, Anatoli
  • Suarez, Javier

Abstract

We study restructuring solutions to the debt overhang problem faced by banks with a deteriorated loan portfolio in the presence of asymmetric information on loan quality. Classical liability restructuring solutions fail to work because banks can overstate the severity of their bad loan problem to obtain additional concessions from existing creditors. A sufficiently large loan sale requirement to the restructuring banks discourages such an opportunistic behavior, so a suitably chosen menu of loan sales cum liability restructuring is able to solve the debt overhang. We discuss the implementation of such a solution for banks funded with insured deposits through loan sales to outside investors supported by an asset protection scheme sponsored by the deposit insurance fund.

Suggested Citation

  • Segura, Anatoli & Suarez, Javier, 2023. "Bank restructuring under asymmetric information: The role of bad loan sales," Journal of Financial Intermediation, Elsevier, vol. 56(C).
    • Handle: RePEc:eee:jfinin:v:56:y:2023:i:c:s1042957323000414
    DOI: 10.1016/j.jfi.2023.101058
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1042957323000414
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jfi.2023.101058?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Thomas Philippon & Philipp Schnabl, 2013. "Efficient Recapitalization," Journal of Finance, American Finance Association, vol. 68(1), pages 1-42, February.
    2. Acharya, Viral V. & Yorulmazer, Tanju, 2007. "Too many to fail--An analysis of time-inconsistency in bank closure policies," Journal of Financial Intermediation, Elsevier, vol. 16(1), pages 1-31, January.
    3. Anat R. Admati & Peter M. Demarzo & Martin F. Hellwig & Paul Pfleiderer, 2018. "The Leverage Ratchet Effect," Journal of Finance, American Finance Association, vol. 73(1), pages 145-198, February.
    4. Mitchell, Janet, 2001. "Bad Debts and the Cleaning of Banks' Balance Sheets: An Application to Transition Economies," Journal of Financial Intermediation, Elsevier, vol. 10(1), pages 1-27, January.
    5. Douglas W. Diamond & Raghuram G. Rajan, 2011. "Fear of Fire Sales, Illiquidity Seeking, and Credit Freezes," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 126(2), pages 557-591.
    6. Berglof Erik & Roland Gerard, 1995. "Bank Restructuring and Soft Budget Constraints in Financial Transition," Journal of the Japanese and International Economies, Elsevier, vol. 9(4), pages 354-375, December.
    7. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 24(Win), pages 14-23.
    8. Emmanuel Farhi & Jean Tirole, 2012. "Collective Moral Hazard, Maturity Mismatch, and Systemic Bailouts," American Economic Review, American Economic Association, vol. 102(1), pages 60-93, February.
    9. Nishihara, Michi & Shibata, Takashi, 2016. "Asset sale, debt restructuring, and liquidation," Journal of Economic Dynamics and Control, Elsevier, vol. 67(C), pages 73-92.
    10. Ofek, Eli, 1993. "Capital structure and firm response to poor performance: An empirical analysis," Journal of Financial Economics, Elsevier, vol. 34(1), pages 3-30, August.
    11. Douglas W. Diamond & Raghuram G. Rajan, 2012. "Illiquid Banks, Financial Stability, and Interest Rate Policy," Journal of Political Economy, University of Chicago Press, vol. 120(3), pages 552-591.
    12. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    13. Brei, Michael & Gambacorta, Leonardo & Lucchetta, Marcella & Parigi, Bruno Maria, 2023. "How effective are bad bank resolutions? New evidence from Europe," Journal of Financial Stability, Elsevier, vol. 67(C).
    14. Todd Keister, 2016. "Bailouts and Financial Fragility," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 83(2), pages 704-736.
    15. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    16. Ansgar Walther & Lucy White & Itay Goldstein, 2020. "Rules versus Discretion in Bank Resolution," The Review of Financial Studies, Society for Financial Studies, vol. 33(12), pages 5594-5629.
    17. Eckbo, B. Espen & Thorburn, Karin S., 2013. "Corporate Restructuring," Foundations and Trends(R) in Finance, now publishers, vol. 7(3), pages 159-288, July.
    18. Max Bruche & Gerard Llobet, 2014. "Preventing Zombie Lending," The Review of Financial Studies, Society for Financial Studies, vol. 27(3), pages 923-956.
    19. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    20. Tri Vi Dang & Gary Gorton & Bengt Holmström & Guillermo Ordoñez, 2017. "Banks as Secret Keepers," American Economic Review, American Economic Association, vol. 107(4), pages 1005-1029, April.
    21. Giammarino, Ronald M, 1989. "The Resolution of Financial Distress," The Review of Financial Studies, Society for Financial Studies, vol. 2(1), pages 25-47.
    22. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
    23. Jean-Edouard Colliard & Denis Gromb, 2018. "Financial Restructuring and Resolution of Banks," Working Papers hal-01933873, HAL.
    24. Philippe Aghion, Patrick Bolton & Steven Fries, 1999. "Optimal Design of Bank Bailouts: The Case of Transition Economies," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 155(1), pages 1-51, March.
    25. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    26. Martin Hellwig, 2017. "Carving out legacy assets: a successful tool for bank restructuring?," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2017_03, Max Planck Institute for Research on Collective Goods.
    27. Dreyer, Mallory, 2021. "Swedish AMCs: Securum and Retriva," Journal of Financial Crises, Yale Program on Financial Stability (YPFS), vol. 3(2), pages 247-263, April.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Anatoli Segura & Javier Suarez, 2019. "Optimally Solving Banks' Legacy Problems," Working Papers wp2019_1910, CEMFI.
    2. Mark Mink & Sebastiaan Pool, 2018. "Bank Recapitalizations, Credit Supply, and the Transmission of Monetary Policy," DNB Working Papers 616, Netherlands Central Bank, Research Department.
    3. Martynova, Natalya & Perotti, Enrico & Suarez, Javier, 2022. "Capital forbearance in the bank recovery and resolution game," Journal of Financial Economics, Elsevier, vol. 146(3), pages 884-904.
    4. Christoph Bertsch & Mike Mariathasan, 2021. "Optimal bank leverage and recapitalization in crowded markets," BIS Working Papers 923, Bank for International Settlements.
    5. Choi, Dong Beom & Eisenbach, Thomas M. & Yorulmazer, Tanju, 2021. "Watering a lemon tree: Heterogeneous risk taking and monetary policy transmission," Journal of Financial Intermediation, Elsevier, vol. 47(C).
    6. Miguel Faria-e-Castro & Joseba Martinez & Thomas Philippon, 2017. "Runs versus Lemons: Information Disclosure and Fiscal Capacity," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 84(4), pages 1683-1707.
    7. Bertsch, Christoph & Mariathasan, Mike, 2015. "Optimal Bank Capitalization in Crowded Markets," Working Paper Series 312, Sveriges Riksbank (Central Bank of Sweden), revised 01 Dec 2017.
    8. Thomas Philippon & Vasiliki Skreta, 2012. "Optimal Interventions in Markets with Adverse Selection," American Economic Review, American Economic Association, vol. 102(1), pages 1-28, February.
    9. Casiraghi, Marco, 2020. "Bailouts, sovereign risk and bank portfolio choices," Journal of Banking & Finance, Elsevier, vol. 119(C).
    10. Keister, Todd & Mitkov, Yuliyan, 2023. "Allocating losses: Bail-ins, bailouts and bank regulation," Journal of Economic Theory, Elsevier, vol. 210(C).
    11. Stijn Claessens & M Ayhan Kose, 2018. "Frontiers of macrofinancial linkages," BIS Papers, Bank for International Settlements, number 95.
    12. Giuliana, Raffaele, 2022. "Fluctuating bail-in expectations and effects on market discipline, risk-taking and cost of capital," ESRB Working Paper Series 133, European Systemic Risk Board.
    13. Suarez, Javier & Sánchez Serrano, Antonio, 2018. "Approaching non-performing loans from a macroprudential angle," Report of the Advisory Scientific Committee 7, European Systemic Risk Board.
    14. Ernesto Pasten, 2020. "Prudential Policies and Bailouts: A Delicate Interaction," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 38, pages 181-197, October.
    15. Saki Bigio & Adrien d'Avernas, 2021. "Financial Risk Capacity," American Economic Journal: Macroeconomics, American Economic Association, vol. 13(4), pages 142-181, October.
    16. Maclachlan, Iain C, 2007. "An empirical study of corporate bond pricing with unobserved capital structure dynamics," MPRA Paper 28416, University Library of Munich, Germany.
    17. Viral V. Acharya & Hamid Mehran & Anjan V. Thakor, 2016. "Caught between Scylla and Charybdis? Regulating Bank Leverage When There Is Rent Seeking and Risk Shifting," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 5(1), pages 36-75.
    18. de La Bruslerie, Hubert & Gueguen, Simon, 2021. "Creditors’ holdup, releveraging and the setting of private appropriation in a control contract between shareholders," International Review of Law and Economics, Elsevier, vol. 68(C).
    19. Emmanuel Farhi & Jean Tirole, 2018. "Deadly Embrace: Sovereign and Financial Balance Sheets Doom Loops," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 85(3), pages 1781-1823.
    20. Thomas Philippon & Philipp Schnabl, 2013. "Efficient Recapitalization," Journal of Finance, American Finance Association, vol. 68(1), pages 1-42, February.

    More about this item

    Keywords

    Non performing loans; Deposit insurance; Debt overhang; Optimal restructuring; State aid;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jfinin:v:56:y:2023:i:c:s1042957323000414. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/622875 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.