Working Paper

Failed bank resolution and the collateral crunch: the advantages of adopting transferable puts

Abstract: Current methods of failed bank resolution are unnecessarily expensive for taxpayers and impose substantial costs on borrowers at failed banks. This situation is due to 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.

Keywords: Bank failures;

Status: Published in AREUEA 22, no. 1 (Spring 1994): 135-47.

Bibliographic Information

Provider: Federal Reserve Bank of Boston

Part of Series: Working Papers

Publication Date: 1992

Number: 92-5