Optimally Solving Banks' Legacy Problems

66 Pages Posted: 10 Aug 2019

See all articles by Anatoli Segura

Anatoli Segura

Bank of Italy

Javier Suarez

Centre for Monetary and Financial Studies (CEMFI); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

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Date Written: June 18, 2019


We characterize policy interventions directed to minimize the cost to the deposit guarantee scheme and the taxpayers of banks with legacy problems. Non-performing loans (NPLs) with low and risky returns create a debt overhang that induces bank owners to forego profitable lending opportunities. NPL disposal requirements can restore the incentives to undertake new lending but, as they force bank owners to absorb losses, can also make them prefer the bank being resolved. For severe legacy problems, combining NPL disposal requirements with positive transfers is optimal and involves no conflict between minimizing the cost to the authority and maximizing overall surplus.

Keywords: non performing loans, deposit insurance, debt overhang, optimal intervention, state aid

JEL Classification: G01, G20, G28

Suggested Citation

Segura, Anatoli and Suarez, Javier, Optimally Solving Banks' Legacy Problems (June 18, 2019). Bank of Italy Temi di Discussione (Working Paper) No. 1227, June 2019, Available at SSRN: https://ssrn.com/abstract=3435125 or http://dx.doi.org/10.2139/ssrn.3435125

Anatoli Segura (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184

Javier Suarez

Centre for Monetary and Financial Studies (CEMFI) ( email )

Casado del Alisal 5
28014 Madrid
+34 91 429 0551 (Phone)
+34 91 429 1056 (Fax)

Centre for Economic Policy Research (CEPR)

United Kingdom

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

HOME PAGE: http://www.ecgi.org

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