Bank Restructuring and Soft Budget Constraints in Financial Transition

@inproceedings{Berglof1995BankRA,
  title={Bank Restructuring and Soft Budget Constraints in Financial Transition},
  author={Erik Berglof and G{\'e}rard Roland},
  year={1995}
}
This paper analyses in a formal model the problem of achieving financial discipline in a transitional economy with bank-intermediated finance. Even if banks have no intrinsic interest in refinancing unprofitable firms, they may still exploit the softness of government. By gambling for government bailouts, banks contribute to softening the budget constraints of enterprises. We show that the poor quality of loan portfolios, the absence of collateral and low bank capitalization are key elements… CONTINUE READING

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