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

Achim Hauck; Ulrike Neyer; Thomas Vieten

doi:10.1016/j.qref.2014.10.002

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

Achim Hauck, Ulrike Neyer, Thomas Vieten

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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 re-establish 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.

Original language	English
Pages (from-to)	116–128
Journal	Quarterly Review of Economics and Finance
Volume	57
Early online date	30 Oct 2014
DOIs	https://doi.org/10.1016/j.qref.2014.10.002
Publication status	Published - Aug 2015

Keywords

Bad banks
Financial crisis
Financial stability
Credit crunch

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10.1016/j.qref.2014.10.002

HAUCK_2014_cright_REF_Re-establishing stability and avoiding a credit crunchAccepted author manuscript (Post-print), 388 KBLicence: CC BY-NC-ND

http://linkinghub.elsevier.com/retrieve/pii/S1062976914000817

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title = "Reestablishing stability and avoiding a credit crunch: comparing different bad bank schemes",

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 re-establish 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",

author = "Achim Hauck and Ulrike Neyer and Thomas Vieten",

note = "NOTICE: this is the author{\textquoteright}s version of a work that was accepted for publication in Quarterly Review of Economics and Finance. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Quarterly Review of Economics and Finance, 2015, DOI: 10.1016/j.qref.2014.10.002 ",

year = "2015",

month = aug,

doi = "10.1016/j.qref.2014.10.002",

language = "English",

volume = "57",

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AU - Hauck, Achim

AU - Neyer, Ulrike

AU - Vieten, Thomas

N1 - NOTICE: this is the author’s version of a work that was accepted for publication in Quarterly Review of Economics and Finance. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Quarterly Review of Economics and Finance, 2015, DOI: 10.1016/j.qref.2014.10.002

PY - 2015/8

Y1 - 2015/8

N2 - 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 re-establish 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.

AB - 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 re-establish 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.

KW - Bad banks

KW - Financial crisis

KW - Financial stability

KW - Credit crunch

U2 - 10.1016/j.qref.2014.10.002

DO - 10.1016/j.qref.2014.10.002

M3 - Article

SN - 1062-9769

VL - 57

SP - 116

EP - 128

JO - Quarterly Review of Economics and Finance

JF - Quarterly Review of Economics and Finance

ER -

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

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Keywords

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