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Failed Bank Resolution and the Collateral Crunch: The Advantages of Adopting Transferable Puts
Author(s) -
Rosengren Eric S.,
Simons Katerina
Publication year - 1994
Publication title -
real estate economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.064
H-Index - 61
eISSN - 1540-6229
pISSN - 1080-8620
DOI - 10.1111/1540-6229.00629
Subject(s) - collateral , incentive , loan , economics , crunch , government (linguistics) , credit crunch , financial system , finance , business , monetary economics , microeconomics , medicine , linguistics , philosophy , physical therapy
Current methods of failed bank resolution are unnecessarily expensive for taxpayers and impose substantial costs on borrowers at failed banks. This situation is the result of distorted incentives imbedded in the standard contract between the government and acquirers of failed banks, which result in more loan foreclosures than if the loan were held by a well‐capitalized bank. This paper proposes a modification to the standard contract in the form of a transferable put, which would introduce market‐based incentives to the disposition of failed bank assets.