Bank Restructuring without Government Intervention

48 Pages Posted: 12 Dec 2019

See all articles by Marcella Lucchetta

Marcella Lucchetta

Ca Foscari University of Venice

Bruno Maria Parigi

University of Padova - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Jean-Charles Rochet

Swiss Finance Institute; University of Geneva - Geneva Finance Research Institute (GFRI); University of Zurich - Swiss Banking Institute (ISB)

Date Written: June 27, 2019

Abstract

When a bank is burdened with Non Performing Loans, an underinvestment problem may arise. Banking Authorities often take the initiative to segregate these Non Performing Loans into a Bad Bank (BB), so that the remaining part of the bank, the Good Bank, finds it profitable to make new loans. These BBs typically involve an injection of public funds.

We propose a different type of bank break up that does not require any government subsidy. The idea is to give to the bank’s shareholders the option to create a BB on their own, and finance it ex-ante by requiring the bank to issue a bail-inable bond that is drawn down when the option is exercised. No tax payer money is involved. Such a restructuring differs from the bail-in regimes in the Bank Recovery and Resolution Directive in the EU and the Dodd-Frank Act in the USA in that it recognizes to the bank’s shareholders the information rents that result from their private information on the bank’s legacy loans.

Keywords: Bad banks, Under-investment, Debt overhang, Bail-inable bond

JEL Classification: G00, G20, G21

Suggested Citation

Lucchetta, Marcella and Parigi, Bruno Maria and Rochet, Jean-Charles, Bank Restructuring without Government Intervention (June 27, 2019). Swiss Finance Institute Research Paper No. 19-63. Available at SSRN: https://ssrn.com/abstract=3501564 or http://dx.doi.org/10.2139/ssrn.3501564

Marcella Lucchetta

Ca Foscari University of Venice ( email )

Venice
Italy

Bruno Maria Parigi

University of Padova - Department of Economics ( email )

via Del Santo 33
Padova, 35123
Italy

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Jean-Charles Rochet (Contact Author)

Swiss Finance Institute ( email )

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

University of Geneva - Geneva Finance Research Institute (GFRI) ( email )

40 Boulevard du Pont d'Arve
Geneva 4, Geneva 1211
Switzerland

University of Zurich - Swiss Banking Institute (ISB) ( email )

Plattenstrasse 14
CH-8032 Zurich, Zurich 8032
Switzerland

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