Optimal Design of Bank Bailouts: The Case of Prompt Corrective Action
The paper investigates the optimal design of bank bailouts in economies where banks can hide loan losses, and focuses on banking regulation via two Prompt Corrective Action instruments: prohibition of dividends and early closure policy. The first has a mitigating effort on moral hazard and regulator’s costs but the second instrument has a damaging impact. As to bad debts and the cleaning of banks’ balance sheets, asset insurance for the bank’s loan portfolio, bank capital and prohibition of dividends motivate banks to disclose loan losses.
Volume (Year): 25 (2012)
Issue (Month): 1 (Spring)
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