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Title:Reestablishing stability and avoiding a credit crunch: Comparing different bad bank schemes PDF Logo
Authors:Hauck, Achim
Neyer, Ulrike
Vieten, Thomas
Issue Date:2011
Series/Report no.:DICE discussion paper 31
Abstract: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.
Subjects:bad banks
financial crisis
financial stability
credit crunch
JEL:G21
G28
G30
Document Type:Working Paper
Appears in Collections:DICE Discussion Paper, Düsseldorf Institute for Competition Economics (DICE)

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