Resolving banking crises - an analysis of policy options
This paper develops a dynamic model to examine the ex-ante and ex-post implications of five policy options for resolving bank failures when the authorities cannot observe the level of non-performing loans (NPLs) held by individual banks. Under asymmetric information, we show that the first-best outcome is achievable when the authorities can close all banks that fail to raise a minimum level of new capital. But when the authorities cannot close banks and must rely on financial incentives to induce banks to liquidate their NPLs, recapitalisation using equity (Tier 1 capital) would be the second-best policy, whereas recapitalisation using subordinated debt (Tier 2 capital) is suboptimal. If the authorities do not wish to hold an equity stake in a bank, they should subsidise the liquidation of non-performing loans rather than inject subordinated debt. We also show that the cost of this subsidy can be reduced if it is offered in a menu that includes equity injection.
Year of publication: |
2006-03
|
---|---|
Authors: | Tanaka, Misa ; Hoggarth, Glenn |
Institutions: | Bank of England |
Saved in:
freely available
Saved in favorites
Similar items by person
-
Reputation, risk-taking and macroprudential policy
Aikman, David, (2012)
-
International spillover effects and monetary policy activism
Lipinska, Anna, (2009)
-
International monetary co-operation in a world of imperfect information
Tan, Kang Yong, (2008)
- More ...