Optimally solving banks' legacy problems

Javier Suarez and Anatoli Segura

No 13718, CEPR Discussion Papers from Centre for Economic Policy Research

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 and provisioning 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 liquidated. For severe legacy problems, combining those NPL-targeted interventions 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: 2019-05
New Economics Papers: this item is included in nep-ban and nep-ias
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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)
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