Abstract

http://ssrn.com/abstract=1321666
 
 

References (33)



 
 

Citations (18)



 


 



Common (Stock) Sense about Risk-Shifting and Bank Bailouts


Linus Wilson


University of Louisiana at Lafayette - College of Business Administration

Yan Wu


Wilfrid Laurier University

January 1, 2010

Financial Markets and Portfolio Management, Vol. 24, No. 1, pp. 3-29, 2010

Abstract:     
If a bank faces potential insolvency, it will be tempted to reject good loans and accept bad loans to shift risk onto its creditors. We analyze effectiveness of buying up toxic mortgages in troubled banks, buying preferred stock, and buying common stock. If bailouts for banks that are deemed "too-big-to-fail" involve buying assets at above fair market values, then these banks are encouraged ex ante to gamble on bad assets. Buying up common (preferred) stock is always the most (least) ex ante- and ex post-efficient type of capital infusion, whether or not the bank volunteers for the recapitalization.

Number of Pages in PDF File: 55

Keywords: asset substitution, banks, bailout, Capital Assistance Program (CAP), Capital Purchase Program (CPP), capital structure, Emergency Economic Stabilization Act (EESA), Leman Brothers, Public-Private Investment Program (PPIP), lending, risk-shifting, too big to fail,Troubled Asset Relief Program (TARP)

JEL Classification: G21, G28, G38

Accepted Paper Series


Download This Paper

Date posted: December 30, 2008 ; Last revised: April 15, 2012

Suggested Citation

Wilson, Linus and Wu, Yan, Common (Stock) Sense about Risk-Shifting and Bank Bailouts (January 1, 2010). Financial Markets and Portfolio Management, Vol. 24, No. 1, pp. 3-29, 2010. Available at SSRN: http://ssrn.com/abstract=1321666

Contact Information

Linus Wilson (Contact Author)
University of Louisiana at Lafayette - College of Business Administration ( email )
Department of Economics & Finance
214 Hebrard Blvd., Room 326
Lafayette, LA 70504-0200
United States
(337) 482-6209 (Phone)
(337) 482-6675 (Fax)
HOME PAGE: http://www.linuswilson.com
Yan Wu
Wilfrid Laurier University ( email )
75 University Avenue West
Waterloo, Ontario N2L 3C5
Canada
Feedback to SSRN


Paper statistics
Abstract Views: 8,046
Downloads: 947
Download Rank: 11,579
References:  33
Citations:  18
People who downloaded this paper also downloaded:
1. Debt Overhang and Bank Bailouts
By Linus Wilson

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo4 in 0.531 seconds