True Taxpayer Burden of Bank Restructuring
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.
|Date of creation:||05 Jun 2009|
|Date of revision:||16 Dec 2010|
|Contact details of provider:|| Postal: Manufacture des Tabacs, Aile Jean-Jacques Laffont, 21 Allée de Brienne, 31000 TOULOUSE|
Phone: +33 (0)5 61 12 85 89
Fax: + 33 (0)5 61 12 86 37
Web page: http://www.idei.fr/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Stein, Jeremy C., 1992.
"Convertible bonds as backdoor equity financing,"
Journal of Financial Economics,
Elsevier, vol. 32(1), pages 3-21, August.
- Jean-Jacques Laffont, 1988. "Fundamentals of Public Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121271.
- Harald Uhlig, 2009.
"A Model of a Systemic Bank Run,"
NBER Working Papers
15072, National Bureau of Economic Research, Inc.
- Zingales Luigi, 2009. "Yes We Can, Secretary Geithner," The Economists' Voice, De Gruyter, vol. 6(2), pages 1-5, February.
When requesting a correction, please mention this item's handle: RePEc:ide:wpaper:24169. See general information about how to correct material in RePEc.
If references are entirely missing, you can add them using this form.