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Good and bad banks

Regis, Luca Good and bad banks. In: Mathematical and Statistical Methods for Actuarial Sciences and Finance Mathematical and Statistical Methods for Actuarial Sciences and Finance. Springer, pp. 359-366. ISBN 978-88-470-2341-3 (2012)

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In the recent financial crisis, reorganizations of distressed financial institutions following the good bank and bad bank model were discussed. In the context of a structural framework and under perfect information, we analyze endogenous capital structure choices of an arrangement constituted by a large regulated unit which manages the more secure assets of a bank and a smaller division - possibly unregulated - which gathers the more risky and volatile ones. We question whether such an arrangement is a priori optimal and whether financial institutions have private incentives to set up different risk-classes of assets in separate entities. We investigate the effect of intra-group guarantees on optimal leverage and expected default costs. Numerical results show that these guarantees can enhance group value and limit default costs when the firm separates its more secure from its more risky assets in regulated entities.

Item Type: Book Section
Identification Number: 10.1007/978-88-470-2342-0_42
Uncontrolled Keywords: Capital structure; good/bad banks; intra-group guarantees; financial groups
Subjects: H Social Sciences > HB Economic Theory
Research Area: Economics and Institutional Change
Depositing User: Ms T. Iannizzi
Date Deposited: 27 Sep 2013 12:56
Last Modified: 27 Sep 2013 12:56
URI: http://eprints.imtlucca.it/id/eprint/1807

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