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Government interventions in banking crises: Assessing alternative schemes in a banking model of debt overhang

Diemo Dietrich and Achim Hauck ()

MPRA Paper from University Library of Munich, Germany

Abstract: We evaluate policy measures to stop the fall in loan supply following a banking crisis. We apply a dynamic framework in which a debt overhang induces banks to curtail lending or to choose a fragile capital structure. Government assistance conditional on new banking activities, like on new lending or on debt and equity issues, allows banks to influence the scale of the assistance and to externalize risks, implying overinvestment or excessive risk taking or both. Assistance granted without reference to new activities, like establishing a bad bank, does not generate adverse incentives but may have higher fiscal costs.

Keywords: Banking crisis; debt overhang; bank lending; capital structure (search for similar items in EconPapers)
JEL-codes: G28 G21 G01 (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-ban
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Related works:
Journal Article: Government interventions in banking crises: effects of alternative schemes on bank lending and risk taking (2012) Downloads
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