Working Paper: NBER ID: w14929
Authors: Thomas Philippon; Philipp Schnabl
Abstract: We analyze government interventions to recapitalize a banking sector that restricts lending to firms because of debt overhang. We find that the efficient recapitalization program injects capital against preferred stock plus warrants and conditions implementation on sufficient bank participation. Preferred stock plus warrants reduces opportunistic participation by banks that do not require recapitalization, while conditional implementation limits free riding by banks that benefit from lower credit risk because of other banks' participation. Efficient recapitalization is profitable if the benefits of lower aggregate credit risk exceed the cost of implicit transfers to bank debt holders.
Keywords: No keywords provided
JEL Codes: G01; G2; G28; G33; G38; H0; H2; H81
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Government intervention through recapitalization (G28) | Increased bank lending (G21) |
| Increased bank lending (G21) | Improved social welfare (D69) |
| Severity of debt overhang (F65) | Effectiveness of recapitalization policy (G28) |
| Efficient recapitalization policy (G32) | Elimination of opportunistic participation (D16) |
| Government intervention through recapitalization (G28) | Extracting entire value of informational rents from banks (G21) |