31 research outputs found

    Government interventions in banking crises: Assessing alternative schemes in a banking model of debt overhang

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    We evaluate policy measures to stop the fall in loan supply following a banking crisis. We apply a dynamic framework in which a debt overhang induces banks to curtail lending or to choose a fragile capital structure. Government assistance conditional on new banking activities, like on new lending or on debt and equity issues, allows banks to influence the scale of the assistance and to externalize risks, implying overinvestment or excessive risk taking or both. Assistance granted without reference to new activities, like establishing a bad bank, does not generate adverse incentives but may have higher fiscal costs.Banking crisis; debt overhang; bank lending; capital structure

    Bank Lending, Bank Capital Regulation and Efficiency of Corporate Foreign Investment

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    In this paper we study interdependencies between corporate foreign investment and the capital structure of banks. By committing to invest predominantly at home, firms can reduce the credit default risk of their lending banks. Therefore, banks can refinance loans to a larger extent through deposits thereby reducing firms’ effective financing costs. Firms thus have an incentive to allocate resources inefficiently as they then save on financing costs. We argue that imposing minimum capital adequacy for banks can eliminate this incentive by putting a lower bound on financing costs. However, the Basel II framework is shown to miss this potential.financial contracting, multinational corporations, internal capital markets

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

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    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. However, an outright sale will be less costly to taxpayers than a repurchase agreement only if the transfer payment is sufficiently low. --bad banks,financial crisis,financial stability,credit crunch

    Bank Lending, Bank Capital Regulation and Efficiency of Corporate Foreign Investment

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    In this paper we study interdependencies between corporate foreign investment and the capital structure of banks. By committing to invest predominantly at home, firms can reduce the credit default risk of their lending banks. Therefore, banks can refinance loans to a larger extent through deposits thereby reducing firms' effective financing costs. Firms thus have an incentive to allocate resources inefficiently as they then save on financing costs. We argue that imposing minimum capital adequacy for banks can eliminate this incentive by putting a lower bound on financing costs. However, the Basel II framework is shown to miss this potential.In diesem Beitrag wird ein Bankenmodell entwickelt, um die Wechselbeziehungen zwischen Unternehmensauslandsinvestitionen und der Kapitalstruktur der finanzierenden Banken zu untersuchen. Es wird gezeigt, dass Multinationale Unternehmen einen Anreiz haben, ineffizient zu investieren, um Finanzierungskosten einzusparen. Der Grund ist, dass eine höhere Depositenrefinanzierung der Bank zwar die Finanzierungskosten senkt, jedoch das Unternehmen dazu zwingt, vornehmlich im Heimatland zu investieren. Es zeigt sich, dass eine Regulierung des Bankkapitals diese Ineffizienzen eliminiert, da durch sie eine Untergrenze fĂŒr die Finanzierungskosten gesetzt wird. Allerdings stellen sich die neuen Baseler Regeln als unzureichend heraus, um dieses Potential auszuschöpfen

    Internationale Finanzintegration und StabilitÀt: Ursachen und vorlÀufige Lehren aus der internationalen Bankenkrise 2007/2008

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    Internationale Finanzintegration und StabilitÀt: Ursachen und vorlÀufige Lehren

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    Since its beginning, the recent financial market turmoil that has come to be known as the „subprime crisis“ has provoked considerable controversy among both, policymakers and scientists. The debate mainly focuses on two questions. The first is whether and how short-term measures should be taken to stabilize the global financial system. The second is which general lessons can be drawn from this crisis. Up to now, several potential causes of the crisis have been discussed in a more or less isolated manner. However, a predominant source of the crisis has not been identified yet. Accordingly, there is still a lack of knowledge regarding general consequences of the crisis for economic policy. The purpose of this article is twofold. First, we show that to a large extent the crisis is due to the economic integration of formerly peripheral countries into the world economy that led to significant savings and investment imbalances. Thus, we argue that the crisis not only is a global phenomenon in its effects but also has global roots. Based on this argument, the second purpose of our paper is to derive implications for economic policy, where we also discuss the consequences for the future design of the global financial architecture.

    Implications of Bank Regulation for Credit Intermediation and Bank Stability: A Dynamic Perspective

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    Business cycles imply liquidity risks for banks. This paper explores how these risks influence bank lending over the cycle. With forward-looking banks, lending cycles, credit booms and busts, or suppressed and highly fragile bank systems can emerge, depending on the magnitude of liquidity risks. In this context, regulatory stability-enhancing measures have some unpleasant effects on bank lending. Imposing countercyclical capital adequacy ratio may amplify procyclicality or result in disintermediation, when liquidity risks are only moderate and financial stability is barely a threat. Adopting a regulatory margin call eliminates failures but stops lending for larger liquidity risks whereas a liquidity ratio might be a way to reduce risk-taking without fully hampering credit intermediation

    Government interventions in banking crises: Assessing alternative schemes in a banking model of debt overhang

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    We evaluate policy measures to stop the fall in loan supply following a banking crisis. We apply a dynamic framework in which a debt overhang induces banks to curtail lending or to choose a fragile capital structure. Government assistance conditional on new banking activities, like on new lending or on debt and equity issues, allows banks to influence the scale of the assistance and to externalize risks, implying overinvestment or excessive risk taking or both. Assistance granted without reference to new activities, like establishing a bad bank, does not generate adverse incentives but may have higher fiscal costs

    The Euro Area Interbank Market and the Liquidity Management of the Eurosystem in the Financial Crisis

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    This paper develops a theoretical model which explains several stylized facts observed in the euro area interbank market after the collapse of Lehman Brothers in 2008. The model shows that if transaction costs are high, banks with a liquidity deficit will prefer to borrow liquidity from the central bank rather than from surplus banks in the interbank market. This implies that the central bank assumes an intermediary function. From a policy perspective, we argue that possible measures of the Eurosystem to reactivate the interbank market may conflict, inter alia, with monetary policy aims

    Government interventions in banking crises: Assessing alternative schemes in a banking model of debt overhang

    Get PDF
    We evaluate policy measures to stop the fall in loan supply following a banking crisis. We apply a dynamic framework in which a debt overhang induces banks to curtail lending or to choose a fragile capital structure. Government assistance conditional on new banking activities, like on new lending or on debt and equity issues, allows banks to influence the scale of the assistance and to externalize risks, implying overinvestment or excessive risk taking or both. Assistance granted without reference to new activities, like establishing a bad bank, does not generate adverse incentives but may have higher fiscal costs
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