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Bank Recapitalization and Restructuring: An Economic Analysis of Various Options

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Abstract

A financial crisis leads to a debt overhang in the banking sector and subsequently to a credit crunch. In most cases, it is not possible to remedy this situation without economic policy measures. In this study, we use a uniform framework to analyze how banks in a crisis situation can be restructured at minimum cost to the taxpayer in order to enable them to function again. We discuss various forms of intervention: measures which do not affect the rights of existing bank owners and creditors (guaranteeing prior debts, purchasing troubled assets, injecting equity) and measures that do (good bank/bad bank, debt-for-equity swap). Measures which minimize the costs to the taxpayer will necessarily affect the rights of existing owners and creditors, meaning that they also raise issues related to the reform of bank insolvency law.

Suggested Citation

  • Helmut Elsinger & Martin Summer, 2010. "Bank Recapitalization and Restructuring: An Economic Analysis of Various Options," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 87-97.
    • Handle: RePEc:onb:oenbmp:y:2010:i:1:b:5
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    More about this item

    Keywords

    financial crisis; bank recapitalization policy; bank insolvency; financial regulation;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G2 - Financial Economics - - Financial Institutions and Services
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • H0 - Public Economics - - General
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts

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