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A note on bank bailout: equity quality and direct equity injections


  • Jyh-Horng Lin
  • Chuen-Ping Chang
  • Wei-Ming Hung


Previous research on market-based evaluation of bank equity with government bailout has modelled the bank as a corporate firm with risky assets and liabilities. No attempt was made to analyse explicitly equity quality expressed as a situation when the carrying value of the bank's equity book is above the market price, in particular, during the financial crisis. The purpose of this article is to model bank equity quality explicitly and examine the relationships between direct equity capital injections by the government and bank interest margin (and thus bank equity quality). Comparative static results with simulation exercises show that the bailout programme of direct equity injections may be efficient in terms of bank equity quality when the bailout amount is relatively small-size and the bank's interest margin is relatively low.

Suggested Citation

  • Jyh-Horng Lin & Chuen-Ping Chang & Wei-Ming Hung, 2012. "A note on bank bailout: equity quality and direct equity injections," Applied Economics Letters, Taylor & Francis Journals, vol. 19(10), pages 947-951, July.
  • Handle: RePEc:taf:apeclt:v:19:y:2012:i:10:p:947-951 DOI: 10.1080/13504851.2011.608636

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    References listed on IDEAS

    1. MacKinnon, James G & Haug, Alfred A & Michelis, Leo, 1999. "Numerical Distribution Functions of Likelihood Ratio Tests for Cointegration," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(5), pages 563-577, Sept.-Oct.
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    4. Casey B. Mulligan & Xavier Sala-I-Martin, 1992. "U.S. Money Demand: Surprising Cross-Sectional Estimates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(2), pages 285-343.
    5. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-1580, November.
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