Optimal Banking Sector Recapitalization

P. Marcelo Oviedo () and Shiva Sikdar

Staff General Research Papers Archive from Iowa State University, Department of Economics

Abstract: Government-financed bank restructuring programs, occasionally costing up to 50% of GDP, are commonly used to resolve banking crises. We analyze the Ramsey-optimal paths of bank recapitalization programs that weigh recapitalization benefits and costs under different financing options. In our model bank credit is essential, due to a working capital constraint on firms, and banks are financial intermediaries that borrow from households and lend to firms. A banking crisis produces a disruption of credit and a fall in output equivalent to those in developing countries affected by banking crises. Full recapitalization of the banking system immediately after the crisis is optimal only if international credit is available. One-shot recapitalization is not optimal with domestically-financed programs, even if the government has access to non-distortionary taxes. The welfare cost of a crisis is substantial: the equivalent permanent decline in the no-crisis steady state consumption ranges between 0.51% and 0.65%, depending on the source of financing the recapitalization program.

Keywords: financial intermediation; bank recapitalization; banking crises; banking capital (search for similar items in EconPapers)
JEL-codes: E44 E62 G21 H21 (search for similar items in EconPapers)
Date: 2008-01-04
New Economics Papers: this item is included in nep-ban and nep-dge
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www2.econ.iastate.edu/papers/p3875-2008-01-04.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:isu:genres:12861

Access Statistics for this paper

More papers in Staff General Research Papers Archive from Iowa State University, Department of Economics Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070. Contact information at EDIRC.
Bibliographic data for series maintained by Curtis Balmer ().