Bank Bailout Menus

47 Pages Posted: 16 Jun 2010 Last revised: 14 Jan 2013

See all articles by Sudipto Bhattacharya

Sudipto Bhattacharya

London School of Economics; Centre for Economic Policy Research (CEPR)

Kjell G. Nyborg

University of Zurich - Department of Banking and Finance; Centre for Economic Policy Research (CEPR); Swiss Finance Institute

Multiple version iconThere are 2 versions of this paper

Date Written: November 2012

Abstract

We study bailouts of banks that suffer from debt overhang problems and have private information about the quality of their assets-in-place and new investment opportunities. Menus of bailout plans are used as a screening device. Constrained-optimality involves over capitalization and nonlinear pricing, with worse types choosing larger bailouts. When investment opportunities follow the assets, we derive an equivalence result between equity injections and asset buyouts. The larger capital outlay under asset buyouts can be offset by borrowing against the assets. If investment opportunities follow the bank, equity injections offer more upside to the bailout agency. This may reduce as well as enhance efficiency, depending on whether screening intensity is needed mostly on assets-in-place or new investments.

Keywords: Bailouts, Equity injections, Asset buyouts, Subsidies, Debt overhang, Private information, Self-selection, Screening, Constrained-optimality.

JEL Classification: G28, G01, D82

Suggested Citation

Bhattacharya, Sudipto and Nyborg, Kjell G., Bank Bailout Menus (November 2012). Swiss Finance Institute Research Paper No. 10-24. Available at SSRN: https://ssrn.com/abstract=1625641 or http://dx.doi.org/10.2139/ssrn.1625641

Sudipto Bhattacharya

London School of Economics ( email )

Houghton Street
London WC2A 2AE
United Kingdom
44 171 955 7320 (Phone)
44 171 955 7420 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Kjell G. Nyborg (Contact Author)

University of Zurich - Department of Banking and Finance ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland
+41 (0)44 634 2980 (Phone)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
270
Abstract Views
2,108
rank
119,802
PlumX Metrics