Working Paper: CEPR ID: DP13718
Authors: Anatoli Segura; Javier Suarez
Abstract: 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 profitable lending opportunities. NPL disposal and provisioning 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 liquidated. For severe legacy problems, combining those NPL-targeted interventions with positive transfers is optimal and involves no conflict between minimizing the cost to the authority and maximizing overall surplus.
Keywords: Non Performing Loans; Deposit Insurance; Debt Overhang; Optimal Intervention; State Aid
JEL Codes: G01; G20; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| NPL disposal requirements (L99) | new lending opportunities (G21) |
| policy interventions targeted at minimizing costs of NPLs (G33) | addressing debt overhang problem (F34) |
| public transfers + NPL-targeted interventions (H87) | optimal outcomes (L21) |
| prudential provisioning (G28) | similar outcomes as NPL disposal (L99) |
| interventions must avoid liquidation (G33) | maintain compliance and new lending (G21) |