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Government interventions in banking crises: Assessing alternative schemes in a banking model of debt overhang

Author

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  • Dietrich, Diemo
  • Hauck, Achim

Abstract

We evaluate policy measures to stop the fall in loan supply following a banking crisis. We apply a dynamic framework in which a debt overhang induces banks to curtail lending or to choose a fragile capital structure. Government assistance conditional on new banking activities, like on new lending or on debt and equity issues, allows banks to influence the scale of the assistance and to externalize risks, implying overinvestment or excessive risk taking or both. Assistance granted without reference to new activities, like establishing a bad bank, does not generate adverse incentives but may have higher fiscal costs.

Suggested Citation

  • Dietrich, Diemo & Hauck, Achim, 2010. "Government interventions in banking crises: Assessing alternative schemes in a banking model of debt overhang," MPRA Paper 24508, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:24508
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    File URL: https://mpra.ub.uni-muenchen.de/24508/1/MPRA_paper_24508.pdf
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    References listed on IDEAS

    as
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    12. Fabian Valencia & Luc Laeven, 2008. "Systemic Banking Crises; A New Database," IMF Working Papers 08/224, International Monetary Fund.
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    More about this item

    Keywords

    Banking crisis; debt overhang; bank lending; capital structure;

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G01 - Financial Economics - - General - - - Financial Crises

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