As part of the series of the "Finance Research Seminar", VGSF welcomes Javier Suarez from CEMFI Madrid to present his research paper.
Optimally Solving Banks' Legacy Problems
We characterize policy interventions directed to minimize the cost to the deposit guarantee scheme and the taxpayers of banks with legacy problems. Non-performing loans (NPLs) with low and risky returns create a debt overhang that induces bank owners to forego pro
table lending opportunities. NPL disposal requirements can restore the incentives to undertake new lending but, as they force bank owners to absorb losses, can also make them prefer the bank being resolved. For severe legacy problems, combining NPL disposal requirements with positive transfers is optimal and involves no conict between minimizing the cost to the authority and maximizing overall surplus.