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

Achim Hauck, Ulrike Neyer, Thomas Vieten

Research output: Contribution to journalArticle

4 Citations (Scopus)
25 Downloads (Pure)

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 reestablish 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
Number of pages13
JournalQuarterly Review of Economics and Finance
Volume57
Early online date31 Oct 2014
DOIs
Publication statusPublished - Aug 2015

Keywords

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

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