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Efficient Recapitalization

  • Thomas Philippon
  • Philipp Schnabl

We analyze government interventions to recapitalize a banking sector that restricts lending to firms because of debt overhang. We find that the efficient recapitalization program injects capital against preferred stock plus warrants and conditions implementation on sufficient bank participation. Preferred stock plus warrants reduces opportunistic participation by banks that do not require recapitalization, while conditional implementation limits free riding by banks that benefit from lower credit risk because of other banks' participation. Efficient recapitalization is profitable if the benefits of lower aggregate credit risk exceed the cost of implicit transfers to bank debt holders.

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File URL: http://www.nber.org/papers/w14929.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14929.

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Date of creation: Apr 2009
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Publication status: published as Thomas Philippon & Philipp Schnabl, 2013. "Efficient Recapitalization," Journal of Finance, American Finance Association, vol. 68(1), pages 1-42, 02.
Handle: RePEc:nbr:nberwo:14929
Note: AP CF EFG LE ME PE
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  1. Marie Hoerova & Cornelia Holthausen & Florian Heider, 2009. "Liquidity hoarding and interbank market spreads: the role of counterparty risk," 2009 Meeting Papers 929, Society for Economic Dynamics.
  2. Gary Gorton & Lixin Huang, 2004. "Liquidity, Efficiency, and Bank Bailouts," American Economic Review, American Economic Association, vol. 94(3), pages 455-483, June.
  3. Benjamin J. Keys & Tanmoy Mukherjee & Amit Seru & Vikrant Vig, 2010. "Did Securitization Lead to Lax Screening? Evidence from Subprime Loans," The Quarterly Journal of Economics, MIT Press, vol. 125(1), pages 307-362, February.
  4. Takeo Hoshi & Anil K Kashyap, 2008. "Will the U.S. Bank Recapitalization Succeed? Eight Lessons from Japan," NBER Working Papers 14401, National Bureau of Economic Research, Inc.
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