Debt Overhang and Bank Bailouts

@article{Wilson2009DebtOA,
  title={Debt Overhang and Bank Bailouts},
  author={Linus Wilson},
  journal={Banking \& Financial Institutions},
  year={2009}
}
  • Linus Wilson
  • Published 12 September 2009
  • Economics
  • Banking & Financial Institutions
When a bank is deemed 'too big to fail' by regulators, it may be tempted to buy risky assets. This paper analyses bank bailouts involving the purchases of toxic assets, preferred stock and common stock when the government wants to encourage efficient lending. It finds that preferred stock recapitalisations are the least efficient in correcting debt overhang problems from both an ex post and ex ante perspective. In contrast, efficient lending and voluntary participation can be best achieved… 
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References

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The paper proposes a framework to analyze the effects of various bank bailout policies on bank managers' incentives first to lend prudently and second to disclose truthfully their non-performing
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