The disposition of failed Japanese bank assets: lessons from the U.S. savings and loan crisis
This paper reviews the Japanese experience with “put guarantees” recently offered in the sale of several failed banks. These guarantees, meant to address information asymmetry problems, are shown to create moral hazard problems of their own. In particular, the guarantees make acquiring banks reluctant to accept first-best renegotiations with problem borrowers. These issues also arose in the U.S. Savings and Loan crisis. Regulators in that crisis turned to an alternative guarantee mechanism known as “loss-sharing arrangements,” with apparently positive results. I introduce a formal debt model to examine the conditions determining the relative merits of these guarantees. The results show that both forms of guarantees reduce expected regulator revenues, but that the impact of economic downturns on the relative desirability of the two guarantees is ambiguous. ; Published in FRBSF Economic Review (2002), p 1-15
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- Oliver Hart & John Moore, 1998. "Default and Renegotiation: A Dynamic Model of Debt," The Quarterly Journal of Economics, Oxford University Press, vol. 113(1), pages 1-41.
- Gupta, Atul & LeCompte, Richard L. B. & Misra, Lalatendu, 1997. "Taxpayer subsidies in failed thrift resolution: The impact of FIRREA," Journal of Monetary Economics, Elsevier, vol. 39(2), pages 327-339, July.
- Stover, Roger D., 1997. "Early resolution of troubled financial institutions: An examination of the accelerated resolution program," Journal of Banking & Finance, Elsevier, vol. 21(8), pages 1179-1194, August.
- Eric S. Rosengren & Katerina Simons, 1994.
"Failed Bank Resolution and the Collateral Crunch: The Advantages of Adopting Transferable Puts,"
Real Estate Economics,
American Real Estate and Urban Economics Association, vol. 22(1), pages 135-147.
- Eric S. Rosengren & Katerina Simons, 1992. "Failed bank resolution and the collateral crunch: the advantages of adopting transferable puts," Working Papers 92-5, Federal Reserve Bank of Boston.
- James, Christopher, 1991. " The Losses Realized in Bank Failures," Journal of Finance, American Finance Association, vol. 46(4), pages 1223-1242, September.
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