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True Taxpayer Burden of Bank Restructuring

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  • Landier, Augustin
  • Ueda, Kenichi

Abstract

We formalize the taxpayer burden implied by various bank restructuring plans. Even assuming minimal frictions, in spirit of Modigliani and Miller (1958), when debt contracts cannot be changed, transfers from the taxpayer (in a Net Present Value sense) are necessary. Debt holders benefit from a lower default probability and a higher recovery given default. Absent government transfers, their gains imply a decrease in equity value. Shareholders will therefore oppose the restructuring unless they receive transfers from taxpayers. The taxpayer burden consists of the NPV of inflows and outflows of cash needed to persuade shareholders (or bank managers) to accept a change in capital structure. The government’s intervention aims at preventing systemic effects from a default of an important bank, and thus targets a default rate. Due to different implied recovery rates given default, the required transfer amounts vary across restructuring plans that achieve the same target default rate. In this regard, asset sales require more transfers than recapitalization or asset guarantees, because asset sales support a higher recovery rate.

Suggested Citation

  • Landier, Augustin & Ueda, Kenichi, 2009. "True Taxpayer Burden of Bank Restructuring," IDEI Working Papers 662, Institut d'Économie Industrielle (IDEI), Toulouse, revised 16 Dec 2010.
  • Handle: RePEc:ide:wpaper:24169
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    References listed on IDEAS

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    1. Zingales Luigi, 2009. "Yes We Can, Secretary Geithner," The Economists' Voice, De Gruyter, vol. 6(2), pages 1-5, February.
    2. Stein, Jeremy C., 1992. "Convertible bonds as backdoor equity financing," Journal of Financial Economics, Elsevier, vol. 32(1), pages 3-21, August.
    3. Uhlig, Harald, 2010. "A model of a systemic bank run," Journal of Monetary Economics, Elsevier, vol. 57(1), pages 78-96, January.
    4. Jean-Jacques Laffont, 1988. "Fundamentals of Public Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121271, January.
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    More about this item

    Keywords

    Bank restructuring; Too big to fail; Bank subsidy; Crisis management;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • H12 - Public Economics - - Structure and Scope of Government - - - Crisis Management

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