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 languageEnglish
    Pages (from-to)116–128
    JournalQuarterly Review of Economics and Finance
    Volume57
    Early online date30 Oct 2014
    DOIs
    Publication statusPublished - Aug 2015

    Keywords

    • Bad banks
    • Financial crisis
    • Financial stability
    • Credit crunch

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