Forbearance and Prompt Corrective Action

Narayana Kocherlakota and Ilhyock Shim

Journal of Money, Credit and Banking, 2007, vol. 39, issue 5, 1107-1129

Abstract: This article investigates whether a bank regulator should terminate problem banks promptly or exercise forbearance. We construct a dynamic model economy in which entrepreneurs pledge collateral, borrow from banks, and invest in long-term projects. We assume that collateral value has aggregate risk over time, that in any period entrepreneurs can abscond with the projects but lose the collateral, and that depositors can withdraw deposits. We show that optimal regulation exhibits forbearance if the ex-ante probability of collapse in collateral value is sufficiently low, but exhibits prompt termination of problem banks if this probability is sufficiently high. Copyright 2007 The Ohio State University.

Date: 2007
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Journal Article: Forbearance and Prompt Corrective Action (2007)
Working Paper: Forbearance and prompt corrective action (2005)
Working Paper: Forbearance and Prompt Corrective Action (2005)
Working Paper: Forbearance and Prompt Corrective Action (2005)
Working Paper: Forbearance and Prompt Corrective Action (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:mcb:jmoncb:v:39:y:2007:i:5:p:1107-1129

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