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

Achim Hauck (), Ulrike Neyer and Thomas Vieten

No 31, DICE Discussion Papers from Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE)

Abstract: 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.

Keywords: bad banks; financial crisis; financial stability; credit crunch (search for similar items in EconPapers)
JEL-codes: G21 G28 G30 (search for similar items in EconPapers)
Date: 2011
New Economics Papers: this item is included in nep-ban
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Citations: View citations in EconPapers (4)

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Journal Article: Reestablishing stability and avoiding a credit crunch: Comparing different bad bank schemes (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:dicedp:31

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