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Reestablishing stability and avoiding a credit crunch: Comparing different bad bank schemes

Listed author(s):
  • Hauck, Achim
  • Neyer, Ulrike
  • Vieten, Thomas

This paper develops a model to analyze two different bad bank schemes, an outright sale of toxic assets to a state-owned bad bank and a repurchase agreement between the bad bank and the initial bank. For both schemes, we derive a critical transfer payment that induces a bank manager to participate. Participation improves the bank's solvency and enables the bank to grant new loans. Therefore, both schemes can reestablish stability and avoid a credit crunch. However, an outright sale will be less costly to taxpayers than a repurchase agreement only if the transfer payment is sufficiently low.

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File URL: https://www.econstor.eu/bitstream/10419/49094/1/667627928.pdf
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Paper provided by University of Düsseldorf, Düsseldorf Institute for Competition Economics (DICE) in its series DICE Discussion Papers with number 31.

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Date of creation: 2011
Handle: RePEc:zbw:dicedp:31
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  1. repec:diw:diwfin:diwfin03012 is not listed on IDEAS
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