Use of Contingent Payment Mechanism in Nonperforming Loan Auctions

Ashish Pandey and Kousik Guhathakurta

Finance Research Letters, 2023, vol. 52, issue C

Abstract: This paper identifies a unique application of the contingent payment auction mechanism by banks in the sale of nonperforming loans to privately-held asset management companies. We demonstrate a lack of separation in the auction mechanism used by banks, with the security bid being a combination of cash and debt in a predetermined proportion, leading to an inefficient public policy outcome. Our findings reveal the possibility of moral hazard and adverse selection associated with the contingent payment auction mechanism in the above setting. We also highlight issues involved in considering auction bids as fair market value.

Keywords: Nonperforming loans; Contingent payment auction; Security bids; Asset management companies; Fair value accounting (search for similar items in EconPapers)
JEL-codes: D44 G21 G33 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:52:y:2023:i:c:s154461232200695x

DOI: 10.1016/j.frl.2022.103519

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