Working Paper: CEPR ID: DP18447
Authors: Anatoli Segura; Javier Suarez
Abstract: We study restructuring solutions to the debt overhang problem faced by banks with a deteriorated loan portfolio in the presence of asymmetric information on loan quality. Classical liability restructuring solutions fail to work because banks can overstate the severity of their bad loan problem to obtain additional concessions from existing creditors. A sufficiently large loan sale requirement to the restructuring banks discourages such an opportunistic behavior, so a suitably chosen menu of loan sales cum liability restructuring is able to solve the debt overhang. We discuss the implementation of such a solution for banks funded with insured deposits through loan sales to outside investors supported by an asset protection scheme sponsored by the deposit insurance fund.
Keywords: non performing loans; deposit insurance; debt overhang; bank restructuring; 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 |
|---|---|
| restructuring solutions involving a combination of loan sales and liability restructuring (G33) | debt overhang problem (F34) |
| requiring banks to sell a sufficient amount of bad loans (G21) | discourages banks from overstating their problems (G21) |
| involvement of the DIF in supporting loan sales (G21) | enhances effectiveness of restructuring plans (G33) |
| truth-telling constraints (Z13) | prevent banks from misreporting loan quality (G21) |