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

Achim Hauck (), Ulrike Neyer and Thomas Vieten

The Quarterly Review of Economics and Finance, 2015, vol. 57, issue C, 116-128

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. An outright sale will be less costly to taxpayers than a repurchase agreement 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: 2015
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Working Paper: Reestablishing stability and avoiding a credit crunch: Comparing different bad bank schemes (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:57:y:2015:i:c:p:116-128

DOI: 10.1016/j.qref.2014.10.002

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