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Reestablishing Stability and Avoiding a Credit Crunch: Comparing Different Bad Bank Schemes (Hauck A., Neyer U., Vieten T.)

Bank Products and Diversification Financial Crises Stability&Soundness

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. 
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Libref/ Hauck A., Neyer U., Vieten T. (2011) "Reestablishing Stability and Avoiding a Credit Crunch: Comparing Different Bad Bank Schemes", DICE discussion paper, No. 31
© Программирование — Александр Красильников, 2008
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