Debt overhang and bank bailouts
When a bank is deemed 'too big to fail' by regulators, it may be tempted to buy risky assets. This paper analyses bank bailouts involving the purchases of toxic assets, preferred stock and common stock when the government wants to encourage efficient lending. It finds that preferred stock recapitalisations are the least efficient in correcting debt overhang problems from both an ex post and ex ante perspective. In contrast, efficient lending and voluntary participation can be best achieved without subsidy by purchasing either toxic assets or common stock. Nevertheless, troubled banks must be subsidised if they will voluntarily participate in any recapitalisation.
Volume (Year): 5 (2012)
Issue (Month): 4 ()
|Contact details of provider:|| Web page: http://www.inderscience.com/browse/index.php?journalID=218 |
When requesting a correction, please mention this item's handle: RePEc:ids:ijmefi:v:5:y:2012:i:4:p:395-414. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Graham Langley)
If references are entirely missing, you can add them using this form.