Bank Restructuring without Government Intervention

Marcella Lucchetta, Bruno Maria Parigi and Jean Rochet
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Marcella Lucchetta: Ca Foscari University of Venice
Bruno Maria Parigi: University of Padua - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

No 19-63, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: When a bank is burdened with Non Performing Loans, an underinvestment problem may arise. Banking Authorities often take the initiative to segregate these Non Performing Loans into a Bad Bank (BB), so that the remaining part of the bank, the Good Bank, finds it profitable to make new loans. These BBs typically involve an injection of public funds. We propose a different type of bank break up that does not require any government subsidy. The idea is to give to the bank’s shareholders the option to create a BB on their own, and finance it ex-ante by requiring the bank to issue a bail-inable bond that is drawn down when the option is exercised. No tax payer money is involved. Such a restructuring differs from the bail-in regimes in the Bank Recovery and Resolution Directive in the EU and the Dodd-Frank Act in the USA in that it recognizes to the bank’s shareholders the information rents that result from their private information on the bank’s legacy loans.

Keywords: Bad banks; Under-investment; Debt overhang; Bail-inable bond (search for similar items in EconPapers)
JEL-codes: G00 G20 G21 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2019-12
New Economics Papers: this item is included in nep-cba
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1963

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