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Optimally solving banks’ legacy problems

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  • Segura, Anatoli
  • Suarez, Javier

Abstract

We characterize policy interventions directed to minimize the cost to the deposit guarantee scheme and the taxpayers of banks with legacy problems. Non-performing loans (NPLs) with low and risky returns create a debt overhang that induces bank owners to forego profitable lending opportunities. NPL disposal requirements can restore the incentives to undertake new lending but, as they force bank owners to absorb losses, can also make them prefer the bank being resolved. For severe legacy problems, combining NPL disposal requirements with positive transfers is optimal and involves no conflict between minimizing the cost to the authority and maximizing overall surplus. JEL Classification: G01, G20, G28

Suggested Citation

  • Segura, Anatoli & Suarez, Javier, 2019. "Optimally solving banks’ legacy problems," ESRB Working Paper Series 96, European Systemic Risk Board.
  • Handle: RePEc:srk:srkwps:201996
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    References listed on IDEAS

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    Cited by:

    1. Anatoli Segura & Alonso Villacorta, 2021. "Firm-bank linkages and optimal policies in a lockdown," Temi di discussione (Economic working papers) 1343, Bank of Italy, Economic Research and International Relations Area.
    2. Carlos Melo Gouveia, 2019. "Portuguese labour market synthetic indicators," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.

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    More about this item

    Keywords

    debt overhang; deposit insurance; non performing loans; optimal intervention; state aid;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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