Optimally solving banks' legacy problems

Anatoli Segura and Javier Suarez

No 1227, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

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.

Keywords: non performing loans; deposit insurance; debt overhang; optimal intervention; state aid. (search for similar items in EconPapers)
JEL-codes: G01 G20 G28 (search for similar items in EconPapers)
Date: 2019-06
New Economics Papers: this item is included in nep-ban, nep-ias and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.bancaditalia.it/pubblicazioni/temi-disc ... 227/en_tema_1227.pdf (application/pdf)

Related works:
Working Paper: Optimally Solving Banks' Legacy Problems (2019)
Working Paper: Optimally solving banks' legacy problems (2019)
Working Paper: Optimally solving banks’ legacy problems (2019)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_1227_19

Access Statistics for this paper

More papers in Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area Contact information at EDIRC.
Bibliographic data for series maintained by ().