Ebook The Economics of Bank Restructuring: Understanding the Options
What is the best policy option for rescuing a troubled systemically important bank? Various plans have been proposed, some of which have already been implemented around the world. Examples include capital injections in the form of equity or hybrid securities (such as convertible debt or preferred shares), asset purchases, and temporary nationalizations. However, the various restructuring options are rarely evaluated and compared with each other based on a coherent theoretical framework. This note develops such a framework.
Claims often heard in the public debate can be clarified and evaluated using this framework. Should bad assets be sold off before a bank is recapitalized? Should hybrid securities, such as preferred stock or convertible debt, be used rather than common stock in recapitalizations? Is it possible to restructure a bank balance sheet without resorting to a bankruptcy procedure and without involving public money? Is it better when taxpayers participate in a rescue plan in order to benefit from upside risk?.
CONTENTS
Executive Summary
I. Introduction
II. A Benchmark Frictionless Framework
- A. Setup
B. First Best—Voluntary Debt Restructuring
III. Restructuring with No Debt Renegotiation
- A. Difficulty of Voluntary Restructuring
B. Government Subsidy and Debt Recovery
C. State-Contingent Insurance: Optimal Subsidy
D. Recapitalization with Common Equity
E. Recapitalization by Issuing Preferred Stock or Convertible Debts
F. Subsidized Debt Buybacks
G. Simple Asset Guarantees
H. Caballero’s scheme
I. Above-Market-Price Asset Sales
J. The Sachs Proposal
K. Combining Several Schemes
IV. Private and Social Surplus from Restructuring
- A. Key Concepts
B. Endogenous Surplus and Restructuring Design
V. Participation Issues under Asymmetric Information
- A. Recapitalization with Asymmetric Information on Across-Bank Asset Quality
B. Asset Sales with within-Bank Adverse Selection (Lemons Problem)
C. Use of Government Information
VI. Other Considerations
- A. Political Constraints
B. If Bankruptcy Is Inevitable
VII. Case Studies
- A. Switzerland: Good Bank/Bad Bank Split in the Case of UBS
B. United Kingdom: Recapitalization and Asset Guarantee for RBS and Lloyds-HBOS
C. United States: The Geithner Plan as of May 2009
VIII. Conclusion
References
Download
PDF Ebook The Economics of Bank Restructuring: Understanding the Options
Posted in :
